FeaturedNationalVolume 13 Issue # 22

From bloom to gloom

Key indicators show Pakistan’s economy faces tough challenges and the next government will have to take harsh measures to put it on the path to recovery. The situation is in stark contrast to the rosy picture of Pakistan, portrayed by the Pakistan Muslim League-Nawaz (PML-N) government and the world’s top financial and media organizations.


Pakistan’s current account deficit, which remained the toughest challenge for economic managers, rose by 43pc to $15.96 billion in the first 11 months of the outgoing fiscal year with higher than the set import target and lower worker remittances. According to the State Bank of Pakistan (SBP), the 11-month deficit stands close to the full-year’s estimate of $16 billion. Economists say the surge suggests the deficit for the full-year would swell to around $17.5 billion by the end of June 2018. The deficit stood at $11.14 million in the corresponding period of the previous fiscal year. Experts say rising imports, declining exports and insignificant surge in worker remittances continued to fuel the current account deficit.


The import of goods in the 11 months has reached $50.71 billion, which is much higher than the government’s set target of $48.8 billion for the year. The imports remained exorbitantly high despite the government’s decision to impose additional regulatory duties on over 300 items to discourage imports during the year. The rupee’s depreciation by over 15pc against the US dollar in the last six months also proved to be futile. Despite the measures, the imports hit record high of $5.8 billion in May 2018. Exports stood at $22.78 billion during the 11 months, which were disastrous after the huge efforts put in by the government to revive exports to the required level in a bid to narrow down the current account deficit. To achieve higher exports, the government extended the export package of Rs180 billion for another year and depreciated the rupee. Besides, remittances and foreign direct investment remained low and contributed to the current account deficit.


Remittances have improved by 3pc to $18.03 billion in the 11 months, but would remain lower than the set target of $20.7 billion. On the other hand, foreign direct investment in the domestic economy dropped by 1.3pc to $2.47 billion, compared to $2.50 billion in the same period of the last fiscal year. The high current account deficit resulted in fast depletion of foreign currency reserves, which fell to less than two months’ import cover to $10.07 billion on June 8, 2018. The caretaker government, with its limited mandate to fix the economy, is mobilising bankers and stockbrokers to make the amnesty scheme successful and the introduction of first ever dollar-based saving certificate for overseas Pakistanis. It is estimated that $1-4 billion will be added to foreign currency reserves through the scheme to declare hidden assets. The government also hopes to generate another $500 million to $1 billion in the next year through the launch of dollar-based savings certificates for overseas Pakistanis. Experts believe the country requires $5 billion by December 2018, to pay off debt and make interest payments in addition to the existing foreign current reserves to successfully avert a default-like situation. The rupee hit an all-time intra-day low of Rs125.50 to the US dollar in the open market on June 21, as speculation about further depreciation of the currency encouraged heavy buying of the greenback.


Seeing Pakistan’s heightened external vulnerability risk, Moody’s Investors Service downgraded the outlook on Pakistan’s rating to negative from stable.“Foreign exchange reserves have fallen to low levels and, absent significant capital inflows, will not be replenished over the next 12-18 months. Low reserve adequacy threatens continued access to external financing at moderate costs, in turn potentially raising government liquidity risks,” it said. The rating agency also expected Pakistan’s external account to remain under significant pressure. “The coverage by foreign exchange reserves of imports will likely fall further from already low levels, while coverage of external debt payments due will weaken from currently adequate levels. In turn, higher foreign currency borrowing needs, in combination with the low levels of foreign exchange buffers, risks weighing on the ability of the government to access external financing at moderate costs. Unless capital inflows increase significantly, Moody’s does not expect official foreign exchange reserves to replenish from their current low levels. Under baseline projection, the import cover of reserves will likely fall to around 1.7-1.8 months over the next fiscal year, below the adequacy level of three months generally recommended by the International Monetary Fund,” it noted.


Meanwhile, the World Bank has released its Global Economic Prospects report for June 2018, that showed Pakistan’s economy would slow down in the next fiscal year after a high growth of 5.8pc. The GDP growth, which was estimated to rise to 5.8pc in the current fiscal year, will moderate to 5pc in 2018-19, reflecting tighter policies to improve macroeconomic stability, it said. The PML-N government had approved a 6.2pc economic growth target for fiscal year 2018-19. The World Bank sees slowdown in economic activities on the assumption that Pakistan could avail an IMF programme, which would require the country to implement tighter monetary and fiscal policies. According to the Financial Express, the apparent third currency devaluation recently, in nearly seven months, by its central bank shows signs of vulnerability in Pakistan’s economy of nearly $300 billion in size. The latest development has once again raised speculations about Pakistan going to the IMF for borrowing loans since 2013. “Conversely, what may be different this time is that there is no unanimity among policymakers on seeking loans from the International Monetary Fund (IMF). In fact there are voices asking to find other options including China,” it noted.


In contrast, a number of reports and the PML-N government painted so much rosy pictures of Pakistan a year ago that Pakistanis thought their country would become an economic superpower in few years. According to the PricewaterhouseCoopers (PwC) report The World in 2050, Pakistan was projected to become the world’s 16th largest economy — in terms of GDP — by 2050, ahead of Italy and Canada. Pakistan is expected to be among the world’s most powerful economies by 2030, said the report carried by the World Economic Forum on its website in 2017. The report, titled The long view: how will the global economic order change by 2050? ranked 32 countries by their projected global gross domestic product by Purchasing Power Parity (PPP) and Pakistan was placed at No. 20 in the list. Last year, the Economist also discussed Pakistan’s journey towards “optimism.” It highlighted a number of developments and achievements of the country under the PML-N government.


The government and its media managers also exploited the reports to fool the nation. They attempted to convince Pakistanis that the country would overcome all its problems and become a developed economy in a few years. However, Pakistan’s economic outlook has changed after the PML-N government completed its five-year term. Policies of the last government still continue in the caretaker setup but Pakistan’s economic condition has worsened; a true picture of its economy has emerged. It means foreign institutions were working on a plan to advance an international agenda in Pakistan and the PML-N government was part of it.