NationalVolume 13 Issue # 24

Pakistan’s problems compounded

Pakistan’s current account deficit has risen to $18b, foreign exchange reserves plunged by a four-year low of $416 million and the rupee has devalued by 22 percent since December. The economic problems for Pakistan have compounded at a time when the Financial Action Task Force (FATF) has already placed it on its grey list.


Terrorism and a poor economy were the biggest challenge for the last government and they will confront the new government in Pakistan as well. Terrorism has been overcome to a large extent, thanks to the efforts by the security agencies, rather than the civilians, but the economic situation has compounded after years of inaction and mismanagement. The situation has reached such an alarming level that the establishment has decided to keep a permanent eye on the economy and not to allow any Ishaq Dar or Nawaz Sharif to mortgage the sovereignty of the country to foreign forces. According to some analysts, there is an understanding in the establishment that Pakistan’s economy was ruined under a plan to make it subservient to foreign powers and create chaos in the country.


The Pakistan Muslim League-Nawaz (PML-N) government of disgraced Prime Minister Nawaz Sharif mortgaged national institutions, airports and even motorways to obtain expensive loans but it failed to reform institutions, like Pakistan Steel Mills, Pakistan Railways, Pakistan International Airlines (PIA) and Water and Power Development Authority (WAPDA), which incurred a Rs3.5 trillion loss in the last five years alone. In 2013, the PML-N government used Jinnah International Airport, Karachi, as security for Sukuk bonds and raised Rs182 billion. It was used many times to obtain loans. The airport was mortgaged to borrow Rs182 billion. In December 2015, Rs117 billion was borrowed again against the airport. In February 2016, Rs116.2 billion and in March 2016, Rs80.4 billion was raised against the airport. The loans were received from local and international institutions and investors.


The PML-N government also raised $1 billion from foreign investors by mortgaging the Islamabad-Chakwal section of the Islamabad-Lahore (M2) Motorway. In 2014, the government had pledged the Hafizabad-Lahore section of the M2 Motorway to raise another $1 billion in terms of Sukuk bonds with a 5-year maturity period. In June 2014, the government borrowed Rs49.5 billion by mortgaging the Faisalabad-Pindi Bhatian Motorway (M3). According to Finance Ministry reports, Peshawar-Faisalabad Motorway, Islamabad-Peshawar Motorway, Faisalabad-Multan Motorway (M-4), Islamabad-Murree-Muzaffarabad Dual Carriageway, Jacobabad Bypass, DG Khan-Rajanpur Highway, Okara Bypass and several other toll-producing projects were pledged to a consortium of banks. Besides, all assets of Pakistan Television (PTV) and Radio Pakistan in the country were mortgaged to get loans. Loans were received to pay loans, which has always been a recipe for disaster for any country.


According to the State Bank of Pakistan (SBP), the current account deficit touched $18 billion in FY18, up 42.5 per cent over the previous fiscal year. Only two years ago, the deficit was $4.876b, surging to $12.621b the following year, before hitting a record high in 2017-18. Foreign exchange reserves fell by $416 million to $15.682b on July 13. The data showed total import of goods and services in FY18 reached $66.2b, compared to $58.6b in the previous fiscal year, an increase of 13pc. On the other hand, exports of goods and services increased to $29.9b, compared to $27.6b last year, an increase of 8.3pc. Exports of goods increased by $2.7b, but the exports of services dropped to $5b, compared to $5.55b last year. The increase in exports failed to keep pace with the growth of imports. The widening trade gap is at the heart of the growing current account deficit, which is leading to a drain in foreign exchange reserves. At $18b for the year, the current account deficit means the economy is burning $1.5b every month on average.


Another bailout package is already being discussed by economic managers after US$1 billion Chinese emergency loan released in the last week of June boosted Pakistan’s reserves enough to cover two months of imports. According to local media reports, the International Monetary Fund (IMF) and Pakistan’s finance ministry have failed to make accurate forecasts about the country’s external sector for the last fiscal year, putting a question mark over the capability of both institutions. IMF projections for the current account deficit and gross official foreign currency reserves for fiscal year 2017-18 were missed by a huge margin. Its first Post Programme Monitoring (PPM) mission had made the projections hardly six months before the close of the last fiscal year and released a report in March, three months before FY18 ended. The IMF forecasts of external debt, imports, trade deficit and foreign direct investment were also wide of the mark. The actual outcome has led to depletion of gross official foreign currency reserves at a more rapid pace besides exposing the country to external account financing challenges. The external debt and liabilities are an area where the IMF has been struggling for the last four years to make accurate projections for Pakistan.


Pakistan’s economic problems have worsened after the Financial Action Task Force (FATF) put it on its grey list on June 28. The country now has up to 15 months to improve its control of terror financing and money laundering, otherwise it will be placed on the black list. The grey list means international financial transactions to Pakistan will be strictly monitored which would create problems for an already struggling economy. As Pakistan’s trade deficit is $37 billion and foreign loans make up 24pc of the GDP, it is expected to pay up to $8.3 billion annually in debt servicing. Being on the grey list, it will be harder for Pakistan to borrow money from foreign countries to meet its existing foreign loan repayment obligations. Pakistan will be left with no choice but to ask China or the International Monetary Fund (IMF) for help.


Pakistan’s economic indicators indicate great risks for it in the future. The new government will have to come up with a contingency plan to deal with it. Loss-making institutions should be privatized or reformed under a roadmap in a few years. The Federal Board of Revenue (FBR) should be revamped to check corruption and collect maximum revenue. Heads of all institutions should be appointed on merit and the government must adopt strict austerity. The next few years would be difficult, but reforms and the China Pakistan Economic Corridor (CPEC) should start producing results after a time and Pakistan might be able to achieve financial stability and genuine growth by the time of the next scheduled elections.