NationalVolume 13 Issue # 11

Deepening financial crisis in the external sector

Last week, while briefing the National Assembly Standing Committee on Finance, State Bank Governor, Tariq Bajwa said that there will be around dollar 12 billion (later revised to dollar 2.5 billion) financing gap in the external sector for the current fiscal year. He did not specify how this gap will be bridged but stated that there would be no issue as the country has foreign exchange reserves of dollar 14.5 billion.

The SBP Governor did not categorically rule out the possibility of going to the capital market again but said that there is no immediate need of short-term commercial borrowings subsequent to capital market transactions of Euro and Sukuk bonds. Regarding the future value of the rupee against the greenback, Tariq Bajwa asserted that the market will determine the actual value of the rupee against the dollar.

He, however, did not rule out the possibility of further depreciation of the rupee. To quote his words, “In our opinion we are near the equilibrium”.  The rupee has lost its value by around 3 percent since July, 2017, and dropped by 5 percent now. The Secretary Finance who was also present at the briefing disclosed that Pakistan is required to repay dollar 5.9 billion external debt servicing and principal amount in the current fiscal year and a payment of dollar 2.4 billion has already been made during July-November, 2017.

Since many issues of critical importance remained to be discussed, the Committee decided to hold a detailed briefing by the Finance Minister, EAD and the SBP on loans and financing requirements of the country in the next meeting. Such a briefing is of vital importance as all relevant government departments, including the present management of the SBP usually, paint a rosy picture of economy. As such, their assessment needs to be fully reviewed and scrutinised.

Recently, Dr. Hafiz Pasha, a renowned economist and former Finance Minister of the country, while speaking at a seminar organised by the German Institute, Friedrich-Ebert-Stiftung, warned that the government will run out of foreign currency reserves which will trigger a financial crisis. According to him, Pakistan’s external financing needs will be dollar 32 billion for the next 18 months, of which only dollar 8 billion will come through the CPEC and FDI whereas the government will have to resort to borrowings to cover the rest.

It is said the real challenge would emerge after departure of the caretaker government.  Experts say that by that time, cracks will widen and foreign currency reserves will fall below dollar 3 billion.  The only way out of the predicament would then be to seek another bailout from the IMF that will not be a joyride to Pakistan due to a change in the US policy stance towards Pakistan.

There is a consensus of opinion among the country’s leading economists that Pakistan is facing a serious external sector crisis which, unlike the previous ones, may roll on for a long time and the IMF may not be as generous as in the past. In all likelihood, the government will run out of foreign currency reserves in less than a year’s time, triggering a financial collapse.

The country has already been facing difficulties in managing its external account due partly to mounting foreign debt repayments and a widening current account deficit. To make matters worse, the government’s response to the impending crisis is both slow and inadequate. It has recently imposed a regulatory duty on certain kinds of imports, offered PM’s export package and lately devalued the currency by only 5 percent and that, too, probably under IMF pressure. Such half-hearted measures may release some pressure on the external sector but provide no durable answer to the enormity of the challenge.

It seems that the government, instead of undertaking the needed reforms, is conducting a “holding operation” that, according to economic experts, is aimed at keeping foreign currency reserves at a level that will allow it to defer the issue till June next year. The only way after the elections and for the new government then would be to go for another bailout package from the IMF.

The economy is in a double bind. The only way out of the nut-cracker for the government is to initiate the long overdue structural reforms. Otherwise, the situation would spin totally out of control. The present policy of ad hocism could delay the problem for a few months more but cannot resolve the real issue in the medium to long-term. Also, the government needs to tell the truth as there is a vast difference between the estimates of the financing gap made by the SBP and the country’s renowned economists who openly say that over the past four-and-half-years, the government has pursued a path of presenting unrealistic and fabricated statistics. Sensitive indicators like debt-to-GDP ratio, inflation and economic growth are manipulated and fudged.

The root problem is that the government has been lying so consistently and for so long that it has now started believing in its own manufactured data. The need of the hour is to come clean. The government must move quickly to dispel the impression that it is playing around with economic figures to save its political image. It must come out with full disclosures to restore the credibility of official statistics.