TIC Analysis |
The Economy of Pakistan was already in a dire state when the current government took office and had to start by seeking a foreign bailout. This time, however, the scale of the bailout needed was much larger than any in the past. The reason for this is an out-of-control trade deficit in recent years, which hit a record figure of $37.7b in 2017-18. While negotiating with the IMF, the government also reached out to friendly Gulf regimes and China in order to plug the finance gap and managed to raise a substantive amount without going to the IMF. Now the government has finalized a deal with the IMF, after meeting the pre-conditions set by the Fund.
Roots of the Crisis
The Balance of Payment problem, the primary reason behind Pakistan’s continuous financial crisis, has been caused by the two factors of trade deficit/Current Account Deficit or CAD (imbalance between imports & exports) and fiscal deficit (when a government’s total expenditures exceed the revenue that it generates).
The trade deficit was massively helped by the former PMLN government through its policy of undervaluing the dollar. The dollar is used in global trade by countries and its value is impacted by a country’s exports and imports. Larger exports will cause the dollar to lose value while more imports lead to an increase in its value. This leads to a natural cycle in which large exports leading to a devaluation of dollar give way to cheaper imports and a subsequent inflating of the dollar that again leads to an increase in exports. However former Finance Minister Ishaq Dar floated 22 bn dollars in the market through loans and brought the dollar price down which flooded the local markets with cheap imports but strangled the local export industry and caused deindustrialization across the country.
The fiscal deficit was also increased by Ishaq Dar and Miftah Ismail through their emphasis on non feasible projects like Metro bus project and Orange Line train and their negligence towards tax reform. The last year of the PMLN under Finance Minister Miftah Ismail for e.g saw the raising of the circular debt by Rs 450B, increase in External debt by $13B, the Current account deficit by $7B, decline of reserves by 40% and an increase in the Fiscal Deficit from 5.8 to 6.6%. Several sectors of the economy were worst hit such as agriculture which decreased by 5.1% in 2018. This scenario was not helped by fudging of economic numbers by the then government team which artificially raised economic indicators such as GDP growth. A prime example was in 2014 when the PMLN portrayed growth as 4.1% to local audiences while showed it as 3.3% to the IMF.
The PTI Government vs the Inherited CAD crisis
The PTI Government has sought to tackle the problem of trade deficit by introducing floating exchange rate which meant devaluation of the rupee, thus making imports more expensive while simultaneously decreasing the price of exports, thus increasing their global demand. This economic policy is known as Export Promotion and many countries have prospered through it. The government has managed to reverse the decline in exports with 7% increase in exports due to rise in production,massive devaluation of the PKR by about 33% from November 2017 to May 2019 as well as increase in investment in high value added products. There is a bigger economic issue of unproductivity, which means that even with lower prices no one is willing to buy Pakistani commodities in other words we are not competitive enough. The govt has tried to ally the problem by arranging for the industry to get electricity at competitive rates in order to promote exports. A reason for the slow increase in exports is global economic slowdown due to factors such as China-US trade war which is causing fall in demand.
Pakistan has managed to decrease the CAD by 27% during the first 10 months of the current fiscal year from $15.86bn to $11.586bn. Asian Development Bank also predicted that CAD is expected to ease in FY2019 equivalent of 5.0% of GDP which will narrow further to 3.0% in FY2020 with easing macroeconomic pressures on the external accounts.
An important component of CAD is debt servicing and liabilities that Pakistan has to pay. Essentially, this means that debt servicing will keep bleeding our economy in the short run, at least. The current govt repaid $7.3 billion as principal amount as well as interest payment during nine months of the current fiscal year. The break-up of Rs7.3 billion showed that Pakistan had repaid $5.184 billion as principal amount and $2.05 billion as interest payment during nine months (July to March) of the ongoing fiscal year.
Tackling the Fiscal Deficit
Another major problem is of fiscal deficit which means that the government spends more than it earns and ultimately resorts to borrowing. CAD is also increased by decrease in revenue collection that is taxes. A decrease in revenue was recorded due to fall in imports, end on taxes of Mobile cards by previous Chief Justice as well as upgrading monthly tax limit to Rs 100,000/- monthly from the 40,000/- monthly by the previous government in its last budget. On this front government has brought in a new man on the top as the head of FBR, to broaden the tax net. Reforming FBR is a medium term but much needed issue and its performance will only be judged after next quarterly report.
Added to this are the structural problems like circular debt which currently stands at Rs 795 bn. Yet it has started to decrease, Officials from the Ministry of Power stated that during 2017-18, the circular debt had increased by Rs 450 billion which was brought down to Rs 293bn during the current year and Rs 96bn by 2019-20. However, the issue of circular debt would be completely overcome by end of next year.
Another major step by the current government has been to curtail public sector losses in government institutions such as PIA, Railways etc. Its efforts have started bearing fruit. The PIA which was in loss has reached breakeven for the first time in decades in 2019. The Pakistan railways recorded an increase in revenue by about 3 bn and the state owned Pakistan National Shipping Corporation PNSC will acquire two new ships for the first time since 1998.
The coming time
While currently, the country is beset with inflation and low economic growth due to the inherited crisis, Pakistan’s macroeconomic indicators are projected to improve in the coming time due to the following reasons,
The start of industrialization under CPEC which will provide 10 million jobs in five years
The incoming investments such as 20bn $ by Saudi Arabia which will manifest into refineries and other assets
The construction of Mohmand Dam which is estimated to creation of 27,000-28,000 jobs as well as the Naya Pakistan Housing Project that is projected to inject Rs 9 Trillion (54 bn$) in the economy and cause creation of 6 million jobs directly and 100 to 150 thousand jobs indirectly.
Construction of local industries such as automobiles under the brands of United, Prince, Proton, KIA, Peugot, Forland that will provide growth as well as cheaper local products.