The World Bank in its South Asia Economic Focus 2017 report has described Pakistan’s external sector as particularly vulnerable, and that remedial action is becoming urgent. The report says that immediate action is needed to rectify it through revival of exports, slowing down of imports and stabilising remittances. The report went on to state that the “capital and financial flows during FY2018 and FY2019 will only partly finance the current account deficit, which will result in a drawdown of reserves during these two years”.
The growing fiscal deficit, trade deficit and current account deficit are the key risks facing the economy. There appears to be realisation on the part of the government, as it has taken steps to encourage exports while raising regulatory duties on 250 unessential imports. However, these measures would not make any substantial favourable impact because the trade deficit in the last fiscal year was $32 billion.
Pakistan is facing economic challenges vis-à-vis fiscal deficit, trade deficit and current account deficit. The reasons are not far to seek. Deteriorating law and order situation, corruption, flawed decisions of inept leadership, energy shortfall and prohibitive cost of energy have made many industries unviable.
The inevitable result is that Pakistan missed all economic targets. As regards the trade deficit ie excess of imports over exports, Pakistan has been trying to overcome this problem for more than half a century. During the Ayub era, Bonus Voucher Scheme was initiated, and later the currency was devalued more than once, but Pakistan could not get rid of the trade deficit. Theoretically speaking, a country whose currency depreciates in terms of foreign currencies will export a greater quantity of goods after adjustment, and this implies that it will collect in its foreign markets a lower unit price in the currency of any foreign country.
For higher growth, there has to be substantial increase in investment; but the present rate of savings to GDP is around 14 percent, which is lower if compared to other developing countries in the world
The assumption here is that the foreign country will not increase its purchases unless it can buy at least somewhat cheaper in terms of the foreign currency because a unit of foreign currency is worth more than expressed in the money of depreciating country.
It is unfortunate that despite more than $20 billion remittances from overseas Pakistanis our current account deficit was more than $12 billion in 2016-17. Incorrigible optimists, however highlight that part of the World Bank report, which says that economic growth for next two years would be more than five per cent, which will not be helpful. For higher growth there has to be substantial increase in investment; but the present rate of savings to GDP is around 14 per cent, which is lower if compared to other developing countries in the world. Secondly, foreign direct investment is not forthcoming due to various factors.
The problem, however, is that inflation hinders the capacity to save, as it erodes the incomes of the people, especially salaried class and fixed income groups. Having said that, the most serious aspect of our dire economic situation is the growing public debt, which is about 68 per cent of the Gross Domestic Product.
It was due to the accumulation of debt-mountain that Pakistan last year had to allocate around Rs 1300 billion for debt servicing alone. And since Pakistan has to pay in instalments to the IMF this year, more than 33 per cent of the tax revenue would have to be allocated for debt-servicing. The question is how despite being a resourceful country, Pakistan has been able to pile up such a huge public debt?
The answer is simple; we have been producing less and consuming more. It should be borne in our minds that the magnitude of the public debt limits the fiscal space to invest in human development.
The threats faced by Pakistan have to be understood in the light of fast changing regional and international situation, which add urgency to revive the economy so that adequate resources could be allocated to defend Pakistan’s integrity and sovereignty.
The problem is that major bilateral creditors want Islamabad to come under the tight scrutiny of the IMF, and there is a possibility that all of them would push Pakistan to negotiate a fresh loan package with the Fund to avoid a crisis. Pakistan would not be able to avert pressure on its exchange rate in the aftermath of the dwindling foreign currency reserves that declined from $24 billion to less than $19 billion during the last four years. If this trend continues, which it most probably will, Pakistan would have no choice but to go to the IMF and accept dictates such as narrow the fiscal deficit, increase the electricity charges and withdraw subsidies.
In the past, IMF conditionalities had aggravated the inequalities of income and wealth and resulted in more unemployment. It is painful to note that every government in Pakistan continued to take loans by accepting and complying with harsh IMF conditionalities. Increase in the rates of utilities produces ‘the multiplier effect’, leading to cost-push inflation; thus rendering it impossible for the local producers to compete with the Multinational Corporations (MNCs). But the crisis is of our own making, as apart from flawed decisions corruption has eaten into the vitals of the nation.
The government should restructure the public-sector enterprises because on average these state enterprises are causing of loss of more than Rs 800 billion per year. There is also a need to control waste , corruption, loot and plunder, otherwise Pakistan can either default or will have to do super power’s bidding due to its dependency syndrome.
The writer is a freelance columnist. He can be reached at [email protected]
Published in Daily Times, October 13th 2017.