FeaturedNationalVolume 13 Issue # 08

Pakistan: A gloomy picture

In its latest Pakistan Development Update report, the World Bank has painted an alarming picture of Pakistan’s economy. It says that Pakistan’s macroeconomic conditions have significantly worsened in the past one year and heavy reliance on short-term foreign commercial loans can create repayment issues in the coming months.

Explaining, the World Bank has said that Pakistan’s reliance on short-term foreign commercial loans has significantly increased as the government obtained $5.8 billion short-term loans in just two years. Pakistan also received record-high gross disbursements amounting to $10.1 billion in the last fiscal year and 43 percent of them came from commercial banks. The government deems this instrument a diversification of its existing funding avenues but the World Bank sees these “bullet facilities” as a source of vulnerability. As a result, the macroeconomic imbalances have significantly worsened over the last nine to 12 months and widening macroeconomic imbalances could increase the country’s vulnerability to external and domestic shocks.

Going further, the World Bank has projected that Pakistan will miss all key macro indicator targets set for this fiscal year, notably fiscal deficit, current account deficit and annual economic growth rate. Against the government’s target of limiting budget deficit to Rs1.5 trillion or 4.1% of the GDP, the lender has projected roughly 6.1 percent of the GDP or Rs2.2 trillion deficit for this fiscal year. About Rs700 billion higher than officially projected deficit would also negatively impact the debt reduction path. Against the official target of 6 percent annual GDP growth rate, the economy is expected to grow at a pace of 5.5 percent this year. The World Bank has projected a 4 percent current account deficit against the official target of 2.6 percent of the GDP. This would mean that there will be more pressure on the already sliding foreign currency reserves.

Part of the overall gloomy picture is the wide current account deficit which is expected to remain a concern, with pressure on international reserves likely to persist for quite some time. It may be added here that the limited exchange rate flexibility has contributed to higher imports and the widening trade deficit. To quote the World Bank, “with declining reserves and elevated debt ratios, Pakistan’s ability to withstand external shocks will be compromised and the risks will remain predominantly on the downside.”  Another dire prediction from the World Bank is that Pakistan’s working-age population is expected to continue to grow at 2.1 percent per year over the next decade. The country will thus face the triple challenge of creating enough jobs for this growing population, improving the quality and productivity of jobs, and enhancing access to jobs and economic opportunities for women.

The latest data released by the State Bank show that the total foreign exchange reserves of the country have decreased by 19 percent, or $4.54 billion, in the last one year and currently stand at a little over$19 billion as on November 15, 2017. The reserves are depleting mainly due to debt repayments, ballooning imports, reduced exports and slowdown in remittances. With depleting reserves, Pakistan has looked to tap all available sources of foreign currency, including Eurobonds, China, international lending agencies as well as selling stakes in profitable entities. At the same time, the country’s foreign debt has now swelled to all-time high of over $83 billion. The crisis in the making would be triggered by the widening current account and trade deficits.

At present, Pakistan has foreign exchange reserves equal to 2.5 months of imports. But things may worsen in the coming days. Pakistan’s reliance on short-term foreign commercial loans has significantly increased during the last two years. According to the World Bank, these facilities of relatively short duration can create repayment issues in the future. To address these types of pressures, Pakistan will need to adopt certain measures like increasing exchange rate flexibility. There is also need for a medium-term agenda to increase economic competitiveness in order to increase exports and contain imports. Pakistan’s trade deficit widened $9.1 billion in the first quarter of the current fiscal year, up 30 percent as imports grew at double the pace of exports. This is an untenable situation which calls for immediate remedial measures. According to experts, the right type of policy interventions will be needed to correct the existing distortions in the economy and accelerate growth.

What is the way out of the situation? The World Bank report has stressed the need to devalue the rupee against the US dollar, saying an overvalued currency severely damaged the exports. It also urged the federal government to have a fully automated and able tax administration to take advantage of modern IT infrastructure that uses the available data to reduce the chances of tax evasion, stressing Islamabad to have an “able tax administration” to broaden the extremely narrow tax base. It is also important to have an appropriate policy response that corrects imbalances and increases buffers able to absorb future shocks to reduce risks and support the positive growth outlook.

There is obviously a need to maintain a competitive Real Effective Exchange Rate (REER) – supporting exports and import-competing industries – as well as efforts to improve revenue collection and improved coordination between the federal and provincial governments to reduce public spending. Indeed, Pakistan faces a serious challenge and it needs to mobilize all available resources to meet it successfully.