NationalVolume 14 Issue # 03

Formidable challenge for the incumbent government

Ascension to the citadel of power may not have been as difficult for the incumbent coalition government of PM Imran Khan as tackling the draconian economic and foreign relations challenges would be, now that it has in effect taken up the reins of the country. This realization must have already started boggling the minds of PM Khan, his economic team, and his coalition partners. They must have already comprehended, and wisely so, that the economic challenges confronting Pakistan are formidable. These challenges will have to be dealt with deftly, and with a sense of utmost urgency and responsibility.

To better appreciate the gravity of the country’s economic predicament, we would need to enumerate and discuss these problems one by one:-

Pakistan’s external debt: External borrowing is an essential phenomenon which all underdeveloped and developing nations of the world are compelled to resort to for attaining its developmental goals. To be more specific, inadequate indigenous financial resources make external borrowing compulsive for the underdeveloped and developing countries. As reported, Pakistan’s total external debt and liabilities (EDL) has peaked to a shockingly high level of $91.761 billion till end March 2018 against $ 60.9 billion in June 2013. This, according to available official data, means that the EDL increased by $30 billion in the last five years. The overall public debt including domestic, external and liabilities in rupee term have touched Rs28, 297 billion till March 31, 2018, indicating that each individual living in the country owed Rs.136,700 debt burden keeping in view the total population of 207 million in accordance with results of the latest census. The IMF projected that Pakistan’s external debt and liabilities could peak to $144 billion in the next five years from $93 billion in fiscal 2018.

Pakistan’s Domestic debt:  There has been an unprecedented increase in Pakistan’s domestic debt. According to the State Bank of Pakistan the provisional total of domestic debt till December 2017 stood at 15.4 trillion rupees. In view of the foregoing, it would be logical to assume that the government borrowing during January and February 2018 must have resulted in increasing the domestic debt to more than 16 trillion rupees, which perhaps was more than the total annual budget outlay for the year. This assumption could be all the more credible given the severe resource constraints of the previous government fuelled by the reluctance of multilaterals and bilaterals to extend programme loans (budget support) due to their lack of confidence in the government.

External and internal debt servicing:  Shocking, yet again. Pakistan, it is reported, is paying over Rs1,620 billion as interest against the estimates of borrowing loans from external and internal sources. Documents reveal that Pakistan will pay an estimated amount of Rs1,391 billion as interest to domestic banks and Rs229 billion to foreign institutions in 2018-19. In addition to this, Pakistan has to repay an amount of over Rs. 21,905 billion to domestic and foreign lenders in the upcoming years. In dollar terms it is reported that on an average Pakistan is paying over $ 4.5 billion annually on external debt servicing. An alarming and worrisome situation indeed! Had frugality been the cornerstone of the policy of successive governments and had the humongous external and domestic loans they had taken, over the past seven decades, been spent conscientiously and judiciously on meeting Pakistan’s developmental needs, the country wouldn’t have had to bear this phenomenal burden of external and domestic debt.

Pakistan’s current account deficit: Pakistan’s current account deficit widened to $18 billion or 5.7 percent of gross domestic product (GDP) during the last fiscal year of 2017/18, putting the rupee at risk of a further big fall and fanning fears about the sustainability of economic growth. The State Bank of Pakistan (SBP) has said the current account deficit amounted to $12.6 billion or 4.1 percent of GDP in FY2017. According to eminent economist Dr. Ashfaque Hassan Khan, Pakistan may have to go to the International Monetary Fund (IMF) to obtain a fresh bailout package. Dr. Khan said his calculation for the current account deficit for the current fiscal year is $21.2 billion. “The external financing requirement is expected to be more than $31 billion,” he forecast.

Pakistan’s trade deficit: Reuters reported that Pakistan’s import bill peaked to $5.8 billion in May 2018; emphasizing that pressure on foreign currency reserves is expected to continue. This, the agency said, broke the record registered four months ago (January 2018), as all administrative measures to contain imports seem to have backfired. Cumulatively, imports increased to $55.2 billion in eleven months, reported the Pakistan Bureau of Statistics (PBS). The import bill of $5.81 billion in May was the highest in the country’s history.

Pakistan’s foreign exchange reserves: According to the State Bank of Pakistan’s (SBP) report published in some of the leading dailies of the country recently, Pakistan’s total liquid foreign reserves stood at $ 16.713 billion. As stated earlier, in May 2018 the monthly import bill of the country jumped to a record $5.8 billion, perhaps the highest in the country’s history. The situation must have become more critical in the following months of the ongoing fiscal year. If that is true then the current foreign exchange reserves would be barely enough to meet the country’s import needs for three months. This gives a clear indication that Pakistan needs to drastically cut down its import needs and increase it exports.

The above data published in some of the leading national English dailies of the country and on the website of the State Bank of Pakistan (SBP), from time to time, are perturbing enough to send shockwaves down the spines of not only the country’s economic managers and the government, but also every educated and concerned citizen of Pakistan. Against the backdrop of the extremely dismal state of affairs on the economic front, judicious economic planning and stringent fiscal measures will have to be taken by the incumbent government. The measures that need to be taken will unambiguously be extremely tough and, therefore, unpopular. But do we have a choice? No we don’t. The sword of the Financial Action Task Force (FATAF) is already hanging over our heads. Pakistan has already been ‘grey listed’ by this inter-governmental body established in 1989 by the Ministers of its Member jurisdictions, to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing, etc. It is being said that FATAF is now all geared up to promote Pakistan to the black list. If that happens, the ramifications would unambiguously be very serious for Pakistan. Immediate and concrete measures will have to be taken to effectively address the charges of money laundering and terrorist financing leveled by FATAF against Pakistan, if Pakistan is to save itself from being black listed.

According to Fitch, a group which is a global leader in financial information services, Pakistan’s PTI-led coalition government will be under instantaneous pressure to arrest the rapid deterioration in external finances and address fiscal challenges, as well as to attract the external funding necessary to meet its financing gap. The new government in Pakistan, it says, has more political capital to take positive though difficult policy actions, but it has a thin majority in the parliament and faces a strong opposition. This could complicate policymaking, the ratings agency conjectured in an assessment of Pakistan’s current fiscal policies.

To add negatively to the extremely critical economic predicament of Pakistan, the US President Donald Trump has not lagged behind. He has, for the present, warned the International Monetary Fund (IMF) to desist from bailing out Pakistan from its profound economic problems. In months to come we could perhaps see the US further tightening the noose around Pakistan’s neck by asking the other international donor agencies such as the World Bank, the Asian Development Bank, and others to refrain from  providing any financial support to Pakistan. What should Pakistan then do under the circumstances? Pakistan should particularly seek help from its time-tested friend China to bail it out from its gargantuan economic difficulties. China, as known to the world, has been an all-weather friend of Pakistan. It has always supported and continues to steadfastly support Pakistan particularly in times of tribulations and also otherwise. Seeking help from Saudi Arabia, which too has been a good friend of Pakistan, could also be a strong possibility. Other rich Muslim countries could also be tapped for assistance that could bail Pakistan out from the current economic quagmire that it is critically mired in.