Pakistan’s balance of payment crisis has no ending. Despite receiving loans from friendly countries, the PTI government faces massive repayments in the next three months as principal and mark-up on foreign loans and international bonds.
It would put pressure on the country’s foreign exchange reserves held by the central bank, which had gone up to 10.7 billion dollars after getting loans from Saudi Arabia, the United Arab Emirates (UAE) and China. But the reserves are now down to a little over 7 billion dollars. On the other hand, the inflow of dollars is very slow in the country. The multilateral and bilateral sources are giving loans to Pakistan at a much slower pace during the current fiscal year, mainly due to the absence of an IMF programme.
Pakistan borrowed $2.94 billion loan from multilateral and bilateral sources in eight months (July to February) of the outgoing fiscal year, which were less than the need of the government. The $2.94 billion loan disbursements from July through February were equal to only 29.4 percent of the original annual estimates.
Pakistan had estimated to receive $10 billion as foreign assistance from bilateral, multilateral and banking sources during FY2019. But the receipts were below expectations. The State Bank of Pakistan (SBP), in its monetary policy, stated that the country’s reserves are still below the standard adequacy levels. However, while the reserves are still below the standard adequacy levels (equal to three months of imports cover), the recent improvement on the external front has improved business confidence to some extent.
It may be recalled here that to avert the balance of payment crisis, Prime Minister Imran Khan had visited friendly countries, like China, the UAE and Saudi Arabia and requested them to provide loans. Pakistan is facing a financing gap of $12 billion after taking into account all projections of dollar inflows during the current fiscal year 2018-19. Pakistan had already received three billion dollars from Saudi Arabia. Meanwhile, the deferred oil payment facility is also in the pipeline, which would reduce the pressure on the imports of the country. The UAE has so far deposited $2 billion in SBP’s account.
However, according to experts, the underlying causes of persistent balance of payments crisis are not purely economic. Political decision-making is equally to blame for it. The problem is rooted in political economy of class and patronage. The concentration of resources in a few hands results in higher imports and, thus, higher trade deficit, while egalitarian distribution of wealth results in higher demand for domestic goods, providing a conducive environment for mass production.
But disparity of resources leads to low industrial capacity due to which exports cannot be increased. This results in surging trade deficit. Maintaining an artificial exchange rate is another culprit. As opposed to the undervaluation policy of China and East-Asian economies, Pakistan has maintained an overvalued exchange rate that encourages imports and penalizes exports.
The country’s import lobby is in a strong position to exert pressure and influence policy-makers to keep an overvalued currency. Secondly, with the rupee to dollar parity becoming a symbol of false national pride and barometer of economic performance, political expediency rather than economic reality guides foreign trade policy.
Crony capitalism thrives under corrupt political governments. The misuse of discretionary powers promotes the SRO culture which benefits favorite businesses. It promotes rent-seeking behavior and provides no incentive to innovate and compete in world markets. The outcome is continuous erosion of Pakistan’s exports potential, and hence, the rising trade deficit.
Pakistan’s sugar mafia is a perfect example of crony capitalism. Pakistani consumers will benefit from low international sugar prices if cotton production replaces water-intensive sugarcane. Export of raw cotton or value-added textile exports will surely earn foreign exchange more than required to finance import of sugar. However, the sugar lobby which is dominant in politics has its way, adding to BoP problems.
The government’s wrong policies encourage import-oriented activities while discouraging export businesses. As the current trend shows, even traditional industrial houses are investing in real estate and building shopping malls because establishing an industrial unit is a more challenging task as compared to parking money in the property sector. The resulting deindustrialization has become a major impediment to exports growth.
The upshot of the analysis is that without structural reforms, we cannot overcome the persistent balance of payment crisis. Civil society and media are powerless and can play no meaningful role in changing counter-productive government policies. Elite capture of autonomous institutions responsible for national economic management cost the public exchequer billions of dollars each year. Further, there are no incentive mechanisms to shift resources from rent-seeking sectors to export-oriented industries based on efficiency, competition and innovation.
Seen in this perspective, Pakistan’s BoP crisis is not purely an economic phenomenon. It is embedded in the structure of society as it is currently composed. As the proponent of Naya Pakistan, the PTI government must move quickly to break the vicious cycle.