FeaturedNationalVOLUME 17 ISSUE # 23

Challenges for the new finance minister

Miftah Ismael, the new finance minister, 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 new government faces the same dilemma. If it makes tough decisions, they would hurt the people. In fact, the past government took some harsh steps to improve the economy, which increased inflation in the country and made the lives of people miserable. If the new government 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. 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 faced an economic mess because the last PML-N 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 government to clear. The result is that the country finds itself knocking on the doors of the International Monetary Fund (IMF) for the remaining tranche while Pakistan already owes the IMF billions from previous programmes. In fact, 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 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, experts warn.

Fitch Ratings has revised its projection for Pakistan’s current account deficit to 5pc of the gross domestic product for the current 2022 fiscal year on near-term policy uncertainty and external risks through the country witnessed a peaceful change in government. The rating agency said the recent oil shock would push up the current account deficit and add to the already high gross external financing needs from an elevated debt-repayment schedule. “We now forecast a current account deficit of around five percent of GDP (around $18.5 billion) for the fiscal year ending June 2022 (FY22), up from four percent in our February review. We expect this to moderate to around four percent in FY23, as oil prices ease.”

Pakistan faces $20 billion in external debt repayments in FY23, though this includes $7 billion in Chinese and Saudi deposits. However, the agency expects these to be rolled over. Rupee depreciation on the back of higher trade deficits and capital outflows, along with debt repayments, has put pressure on liquid foreign-exchange reserves with the State Bank of Pakistan (SBP), which fell by $5.1 billion between end-February and April 1, 2022, to $11.3 billion. “We believe the decline also partly reflects repayment of a $2.4 billion loan from China that is slated to be renewed,” Fitch said.

Setbacks to the reforms made in line with the International Monetary Fund (IMF) programme or holdups in the programme itself could make Pakistan’s access to the global debt markets more difficult, the ratings agency said. The previous government’s implementation of reforms in line with an IMF programme helped in accessing global debt markets, which was highlighted by the issuance of a $1 billion sukuk in January 2022. Since then, the country’s access to private creditor finance has been challenged by external factors, such as rising US interest rates and heightened investor risk aversion around the Ukraine conflict. “We believe setbacks to reform or the IMF programme would make access even more difficult,” it noted.

Pakistan has not been able to rely on consistent foreign investment for more than stopgap measures. It 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. 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.