Among the myriad economic challenges facing the incoming PTI government, two important ones are stabilising the local currency and building the foreign exchange reserves. Over the last few months, the country’s economic situation has worsened steeply as the foreign exchange reserves have depleted due to widening of current account deficit and repayment of previous loans. The current account deficit stood at $18 billion during the previous fiscal year. Similarly, the Pakistani rupee is depreciating as the dollar recently had gone beyond Rs130 last week. It is now back at Rs12 to the dollar, (at the time of writing)
As of last week, foreign exchange reserves stood at $9.5 billion, which are enough to cover less than two months’ imports bill. Reserves would come under further pressure as the country would have to repay two billion dollars of foreign loans in the next few weeks. Meanwhile, the current account deficit is widening at a rapid pace, which is eroding the forex reserves. On the other hand, the budget deficit is expectedly to go beyond 7 percent of the GDP (Rs2.5 trillion) during FY2018.
It is a matter of concern that Pakistan’s debt has increased to an unsustainable level of Rs24.5 trillion or 72 percent of the total size of the economy. The public debt of Rs24.5 trillion includes domestic debt of Rs16.5 trillion and external debt of Rs8 trillion. A high official of the Finance Ministry recently said that debt would rise to 74 percent of the GDP during the ongoing fiscal year. It is relevant to note here that the Fiscal Responsibility and Debt Limitation Act, 2005 (FRDLA, 2005) had set the limit that public debt will not exceed 60 percent of the GDP.
The economy of Pakistan is seriously constrained by the balance of payments disequilibrium. Experts have noted that whenever the real GDP grows above 5 percent, cracks start to appear on the external front. This shows that Pakistan’s export structure does not support growth of the real economy beyond a certain threshold. The low-income elasticity of exports acts as a hurdle to rapid growth. The situation also implies that real growth in GDP above 5 percent requires foreign borrowing. That is the reason why the economy had to seek around $11.5 billion in external financing in FY18.
Every political opposition raises a hue and cry about the horrors of debt without understanding the underlying dynamics of economic realities. But it has been noticed that when the opposition comes to power, it generally follows the trail blazed by the preceding government. It is difficult to say if this time around it will be different. In all probability, the new political administration will follow in the footprints of its predecessor.
In this context the stage seems to have been set by the caretaker government by letting the rupee find its so-called equilibrium or market value. Such actions can easily be justified on the basis of standard economic theory. However, the structural characteristics of Pakistan’s economy do not support the propositions if history is any guide.
During 2002 to 2007, the rupee remained strong vis-à-vis the dollar and there were growing calls that the currency had become overvalued and the economy required an abrupt devaluation. The currency was allowed to fall extensively in 2008 and the burden of adjustment fell on the real economy in the form of low GDP growth. Similarly, from September 2013 to December 2017, the rupee was not allowed to weaken against the dollar and questions were repeatedly raised about the currency’s overvaluation. Over the past two months we have seen bouts of depreciation taking place and it is being hoped that the situation will improve as the time goes by. This time too, the burden of adjustment will fall on the real economy.
In a nutshell, the upcoming challenge for the new political government is to prepare a home-grown programme to restart the engine of the economy as an International Monetary Fund’s (IMF) programme looms on the horizon. If the programme is not home grown as happened previously, the new government would have to face the wrath of the swelling army of frustrated youth.
The PTI chairman, in a recent media talk, admitted that the country’s economy is facing serious challenges. He said that fiscal and trade deficits are touching an all time high, while the rupee is touching a historic low and public debt is ballooning. Imran Khan attributed all these economic ills to a dysfunctional and failed governance system. He vowed to reduce the cost of doing business and bring investment into the country after eliminating corruption.
Outlining its economic policy, the PTI in its manifesto has said that it would boost the tourism industry, develop the IT sector to build a knowledge economy, strengthen international trade, revitalize the textile sector and push exports. It would plans to unleash Pakistan’s potential in agriculture, revamp the livestock sector, build dams, tackle Pakistan’s water scarcity challenges and revive the fisheries industry.
No wonder, the business community has pinned its hopes on the economic revival policies of the next government. The Islamabad Chamber of Commerce and Industry (ICCI) has called upon the PTI to announce a short-term plan for quick revival of the economy. The ICCI has said that the economy of Pakistan is currently confronted with many challenges as the rupee has witnessed record depreciation and trade deficit has swelled to over $ 37 billion. Instead of becoming a manufacturing hub, Pakistan is fast turning into a trading country. According to the ICCI, all these challenges demand that the new government should accord top priority to formulate a new strategy in consultation with the private sector to turn around the economy.
Economic experts have warned that while initiating long overdue structural reforms, the newly elected government may have to approach International Monetary Fund (IMF) for a bailout package to stabilise the external sector. A senior leader of the PTI has stated that the new government would decide to approach the IMF for a fresh bailout package after thoroughly reviewing the economic situation and on the basis of briefings from the ministry of finance and Federal Board of Revenue. The situation is deteriorating fast and the new government will have to move with speed to form a short term plan and a long term strategy to convert its economic vision into reality.