FeaturedNationalVOLUME 15 ISSUE # 10

Another tough year ahead

The people of Pakistan have faced the toughest year of their lives in 2019 in the government of Prime Minister Imran Khan and international institutions and experts have warned the next year would not be easy either. Pakistan will continue to face challenges related to lasting measures to end a crippling cycle of debt.

The balance of payments crisis is imminent in Pakistan, if its economy grows more than 3.8% annually without fixing existing structural economic imbalances, an Asian Development Bank (ADB) research paper. In order to avoid the next balance of payments crisis, Pakistan will have to fix its exports and reduce dependency on imports, according to the working paper, “Why Pakistan’s economic growth continues to be balance of payments constrained,” written by ADB economists Kristian Rosbach and Lilia Aleksanyan.

“In the current structural and product specialisation circumstances, if Pakistan’s economy is to grow faster than 3.8% in the medium-term, external imbalances will occur,” according to the finding of the authors. After witnessing the 2013-18 period of high economic growth, Pakistan again faced a balance of payments crisis, which forced the government of Prime Minister Imran Khan to sign a tough International Monetary Fund (IMF) deal that suffocated economic growth and is now causing increase in poverty and unemployment, it noted. The working paper underlined that the stagnating value of exports since 2012 and slowing remittance growth since 2014 are likely further shifting the BOP equilibrium growth rate downwards from the 3.8%. In the past, macroeconomic measures to reverse foreign reserve outflows often resulted in slowing economic growth. Last year, Pakistan recorded a low economic growth rate of 3.3%, which the finance ministry has expected to further slow down to 2.4% in this fiscal year. However, any growth rate that is below 5% to 6% increases unemployment in Pakistan, according to independent Pakistani economists.

Meanwhile, the International Monetary Fund (IMF) has warned that Pakistan remains at risk of being placed on the Paris-based Financial Action Task Force (FATF) “blacklist” that could have implications for capital inflows to the country. “A potential blacklisting by the FATF could result in a freeze of capital flows and lower investment to Pakistan,” stated the staff-level report. It also disclosed significant increase in electricity prices from the next month, in addition to re-introduction of debt servicing surcharge in power bills on account of circular debt-related fresh borrowings. The report admits that the quality of fiscal adjustments under the IMF programme was not high in the first quarter (July-September).

The general government debt, including guarantees and IMF borrowing, rose to 88% of GDP by end of last fiscal year, which was higher by 8.7% of the GDP against the IMF’s own estimates, according to the report. The IMF said that debt in the previous fiscal year increased as a consequence of the fiscal slippages, the exchange rate depreciation and the government’s decision to increase cash deposits considerably to provide a financing cushion against potentially unfavourable market conditions. For this fiscal year too, the IMF has revised its public debt and liabilities projections upward to 84.7% of the GDP or Rs37.6 trillion. The IMF had earlier projected public debt and liabilities at Rs35.7 trillion or 80.5% of the GDP. It has now increased the estimates by 4.2% of the GDP or Rs1.9 trillion.

The IMF has kept the economic growth rate target unchanged at 2.4% for the current fiscal year but added net exports are now expected to provide a larger contribution to growth mainly due to greater import compression. Growth is projected to strengthen to around 3% in the next fiscal year as policies take hold and confidence and investment strengthen. The IMF has also kept medium-term economic growth rate prospects unchanged at 4.5% to 5%. “Anecdotal evidence suggests unemployment is rising, but this may be masked by considerable underemployment in the informal sector”. The social conditions remain challenging and poverty remains a significant concern and there is a large gender gap.

Average CPI inflation is projected to decelerate slightly to 11.8% in this fiscal year as administrative and energy tariff adjustments are expected to offset the effects from weak domestic demand. Thereafter, inflation is expected to converge to SBP’s 5% to 7% in medium- term. Despite signs that inflation has started to stabilize, headline and core inflation remain high and are expected to decline only gradually as upcoming energy tariff adjustments and the pass-through from volatile international oil prices put upward pressure on inflation.

Experts say Pakistan’s economic challenges will be compounded in the next by several factors. One is its failing state-owned enterprises. The domestic debt of these companies — which include Pakistan’s national airline and railway — increased by nearly 250 per cent between 2013 and 2018, and

The people of Pakistan have faced the toughest year of their lives in 2019 in the government of Prime Minister Imran Khan and international institutions and experts have warned the next year would not be easy either. Pakistan will continue to face challenges related to lasting measures to end a crippling cycle of debt.

The balance of payments crisis is imminent in Pakistan, if its economy grows more than 3.8% annually without fixing existing structural economic imbalances, an Asian Development Bank (ADB) research paper. In order to avoid the next balance of payments crisis, Pakistan will have to fix its exports and reduce dependency on imports, according to the working paper, “Why Pakistan’s economic growth continues to be balance of payments constrained,” written by ADB economists Kristian Rosbach and Lilia Aleksanyan.

“In the current structural and product specialisation circumstances, if Pakistan’s economy is to grow faster than 3.8% in the medium-term, external imbalances will occur,” according to the finding of the authors. After witnessing the 2013-18 period of high economic growth, Pakistan again faced a balance of payments crisis, which forced the government of Prime Minister Imran Khan to sign a tough International Monetary Fund (IMF) deal that suffocated economic growth and is now causing increase in poverty and unemployment, it noted. The working paper underlined that the stagnating value of exports since 2012 and slowing remittance growth since 2014 are likely further shifting the BOP equilibrium growth rate downwards from the 3.8%. In the past, macroeconomic measures to reverse foreign reserve outflows often resulted in slowing economic growth. Last year, Pakistan recorded a low economic growth rate of 3.3%, which the finance ministry has expected to further slow down to 2.4% in this fiscal year. However, any growth rate that is below 5% to 6% increases unemployment in Pakistan, according to independent Pakistani economists.

Meanwhile, the International Monetary Fund (IMF) has warned that Pakistan remains at risk of being placed on the Paris-based Financial Action Task Force (FATF) “blacklist” that could have implications for capital inflows to the country. “A potential blacklisting by the FATF could result in a freeze of capital flows and lower investment to Pakistan,” stated the staff-level report. It also disclosed significant increase in electricity prices from the next month, in addition to re-introduction of debt servicing surcharge in power bills on account of circular debt-related fresh borrowings. The report admits that the quality of fiscal adjustments under the IMF programme was not high in the first quarter (July-September).

The general government debt, including guarantees and IMF borrowing, rose to 88% of GDP by end of last fiscal year, which was higher by 8.7% of the GDP against the IMF’s own estimates, according to the report. The IMF said that debt in the previous fiscal year increased as a consequence of the fiscal slippages, the exchange rate depreciation and the government’s decision to increase cash deposits considerably to provide a financing cushion against potentially unfavourable market conditions. For this fiscal year too, the IMF has revised its public debt and liabilities projections upward to 84.7% of the GDP or Rs37.6 trillion. The IMF had earlier projected public debt and liabilities at Rs35.7 trillion or 80.5% of the GDP. It has now increased the estimates by 4.2% of the GDP or Rs1.9 trillion.

The IMF has kept the economic growth rate target unchanged at 2.4% for the current fiscal year but added net exports are now expected to provide a larger contribution to growth mainly due to greater import compression. Growth is projected to strengthen to around 3% in the next fiscal year as policies take hold and confidence and investment strengthen. The IMF has also kept medium-term economic growth rate prospects unchanged at 4.5% to 5%. “Anecdotal evidence suggests unemployment is rising, but this may be masked by considerable underemployment in the informal sector”. The social conditions remain challenging and poverty remains a significant concern and there is a large gender gap.

Average CPI inflation is projected to decelerate slightly to 11.8% in this fiscal year as administrative and energy tariff adjustments are expected to offset the effects from weak domestic demand. Thereafter, inflation is expected to converge to SBP’s 5% to 7% in medium- term. Despite signs that inflation has started to stabilize, headline and core inflation remain high and are expected to decline only gradually as upcoming energy tariff adjustments and the pass-through from volatile international oil prices put upward pressure on inflation.

Experts say Pakistan’s economic challenges will be compounded in the next by several factors. One is its failing state-owned enterprises. The domestic debt of these companies — which include Pakistan’s national airline and railway — increased by nearly 250 per cent between 2013 and 2018, and in 2019 they continued to borrow heavily. Their struggles are a big reason why Pakistan’s public debt stood at a whopping 86.5 per cent of GDP in mid-2019.

To add to public woes, the Oil and Gas Regulatory Authority has asked the government to increase prices for gas consumers by up to 221 per cent with effect from January 1, 2020, to generate about Rs40 billion in additional funds required by the two gas utilities. If electricity and gas prices are increased further, it will become unbearable for the common man, who already finds it hard to make both ends meet. The opposition will also attempt to exploit the situation. Doubts were raised about the ability of the Pakistan Tehreek-i-Insaf (PTI) government to fix the economy. It has proved them true. in 2019 they continued to borrow heavily. Their struggles are a big reason why Pakistan’s public debt stood at a whopping 86.5 per cent of GDP in mid-2019.

To add to public woes, the Oil and Gas Regulatory Authority has asked the government to increase prices for gas consumers by up to 221 per cent with effect from January 1, 2020, to generate about Rs40 billion in additional funds required by the two gas utilities. If electricity and gas prices are increased further, it will become unbearable for the common man, who already finds it hard to make both ends meet. The opposition will also attempt to exploit the situation. Doubts were raised about the ability of the Pakistan Tehreek-i-Insaf (PTI) government to fix the economy. It has proved them true.

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