Dr Abdul Hafeez Sheikh, the new Adviser to the Prime Minister on Finance, Revenue and Economic Affairs, faces an uphill task to revive Pakistan’s economy, which has deteriorated after decades of mismanagement and inaction. Fast depleting foreign exchange reserves, low exports, high inflation, growing fiscal deficit and rising current account deficit are major challenges which are not easy to handle.
Pakistan’s successive governments have faced the same problems for decades but they failed to plug the gaps for political gains. Every government has inherited a bigger crisis than its predecessor after President Gen (retd) Pervez Musharraf’s regime. The Pakistan Tehreek-i-Insaf (PTI) government of Prime Minister Imran Khan faces the same dilemma. If it takes tough decisions, they would hurt the people. In fact, it has already taken some harsh steps, which have increased inflation in the country and made life miserable. If it takes more steps to revive the economy, it may provide an opportunity to the opposition to exploit the situation and provoke the people against it. The opposition has already announced a “long march” on Islamabad against government policies after Eid. However, if the government succumbs to the pressure and reneges on its promise of reforms, the economy will worsen. It is time the government broke the cycle of passing the crisis to the next government.
Experts say the PTI finds itself in an economic mess because the last government failed to use favorable domestic and international circumstances to address the chronic issues. Instead, the issues became more complicated by a wrong set of policies by the Pakistan Muslim League-Nawaz (PML-N), especially the policy to artificially stabilize the value of the rupee for which (borrowed) $24 billion were injected by the government in the open market to keep the value of the rupee below Rs105 a dollar from 2014-2017. The overvaluation of the rupee from 2014 to 2017, according to eminent economist Dr Hafeez Pasha, was a serious mistake, leading to subsidized imports and reduced exports, a large current account deficit and fast rising debt repayment liabilities.
The mismanagement and negligence of decades have left an enormous mess for the PTI government to clear. The result is that the country finds itself knocking on the doors of the International Monetary Fund (IMF) for its 22nd loan while Pakistan already owes the IMF billions from previous programmes. “Indeed, 30.7pc of Pakistan’s government expenditure is earmarked for debt servicing, which cannot be supported by its decreasing revenues. Already on the Financial Action Task Force’s (FATF) grey list, and with the current PTI government enjoying internal institutional consensus on the national agenda, Pakistan must focus its attention on resolving its economic woes before it finds itself on the shores of bankruptcy,” the Diplomat magazine noted.
In 2019, Pakistan finds itself facing a dire macroeconomic crisis. It is spending more on imports than it receives on exports, with its current account deficit having risen from $2.7 billion in 2015 to $18.2 billion in 2018. According to the Institute of Strategic Studies Islamabad, the major driver of the rising current account deficit is an expanding trade deficit, which is mostly due to the rising imports under new China-Pakistan Economic Corridor (CPEC) projects and low exports in general. The previous government focused more on import-led growth strategy to finance large scale projects under the CPEC. By the end of June 2018, the gross public debt of Pakistan reached $179.8 billion, showing an increase of $25.2 billion within a year. More than half of this increase in gross public debt was due to an increase in public external debt, which grew by 30.1pc. In 2018, the depreciation of the Pakistani rupee against the US dollar alone was responsible for an excessive US $7.9 billion increase in public external debt.
Despite the massive depreciation in the rupee, Pakistani exports have remained almost the same. Meanwhile, the government’s external debt has also increased from $64.1 billion in June 2018 to $65.8 billion in January 2019. The inflation rate is now touching 9.4 percent, which is a record level high over the last five years mostly due to rupee depreciation and rising energy prices. Along with a depreciating rupee that has made imports costlier, low foreign investment due to Pakistan’s security and political challenges has also severely hit its foreign exchange reserves. Despite rising deficits, Pakistan’s tax revenue was only 13pc of its GDP in 2018. During the current fiscal year, the country has seen a decline in its revenues while expenditures have increased, resulting in a half-year fiscal deficit of 2.7pc of GDP, the highest since 2010-11. According to the State Bank of Pakistan, the sharp decline in revenue can be attributed to a fall in development spending, reductions in income and corporate taxes, and taxes on petroleum products, as announced by the previous PML-N government. Similarly, the previous government failed to make any significant progress in enhancing exports: in fact, Pakistan’s total exports fell in real terms during the PML-N’s tenure.
With its domestic industry in ruins, Pakistan has not been able to rely on consistent foreign investment for more than stopgap measures. It recently received $2 billion from the United Arab Emirates (UAE) through the Abu Dhabi Fund for Development (ADFD), which provides concessionary development loans. The inflow increased Pakistan’s foreign reserves from $14.956 billion at the start of March 2019 to $17.398 billion. In February, Saudi Crown Prince Mohammad bin Salman signed seven Memorandums of Understanding (MoUs) with Pakistan, pledging up to $21 billion worth of investment over the next six years. However, relying only on foreign aid and friendly countries for loans is not enough. If Pakistan is to tackle its current account deficit in the long run, the government must take substantial steps to improve the macroeconomic conditions of the country and modernize its industrial sector to become more competitive in international markets.