INSIGHT
Crunch bells have started ringing in an election year, forcing the beleaguered PML (N) government to desperately look for more external inflows to avert yet another foreign exchange crisis. The dwindling foreign reserves are speedily declining and as such are fast becoming Achilles’ heel of the teetering economy that is still to be significantly stabilized.
Fears are being expressed by the independent economists that Pakistan would soon be knocking the doors of the IMF for certain emergency lending to avoid any default situation. Now when there is a pressure on reserves and macroeconomic stability is waning, planners are reportedly facing problems to finalize the new budget to be announced on May 26.
Slowing down of both exports and home remittances, coupled with increase in the import of capital goods including machinery has brought more pressure on the external account. Low level of exports and stagnating Foreign Direct Investment (FDI), coming down to less than $1 billion a year from $5.5 billion in 2007-08 is also one of the major causes of growing debt burden.
A fresh warning came last week when the Moody’s Investors Services, a New York Based credit rating agency released its new report predicting that Pakistan’s external debt will grow to $79 billion by the end of the current financial year, a figure higher than the initial estimates. The credit rating agency opined that Pakistan’s weak fiscal strength will weigh in on its ability to afford the ever mounting debt burden.
It listed a number of challenges including high public debt, weak physical and social infrastructure, a fragile external payment position and high political risk. According to Moody, the country’s external debt will increase to $79 billion out of which the public sector component is $77 billion. The forecast for the outgoing financial year is much higher than what was earlier assessed by the central bank.
The State Bank of Pakistan (SBP) had shown total external debt and liabilities at $74.2 billion by the end of December 2016 that includes $64.5 billion external debt. The increase of external debt to $79 billion simply means that the government has added $14.5 billion debt in the last four year alone.
“What I had predicted six months ago has now proved correct and vindicated my position,” said renowned economist Dr Ashfaque Hasan Khan. He said he had said the country’s external debt would grow as high as $79 billion at the end of 2106-17.
“My forecast now is that external debt will grow as high as $110 billion by 2020,” he said adding that Moody’s forecast remained B-3 stable outlook which was not encouraging. Had the economy performed well, the credit rating agency’s outlook would have gone B-3 positive and not stable which shows all is not well for the country’s struggling economy.
“Where are the claims of the finance minister that the economy has stabilized with reserves substantially improved and declined debt,” Dr Khan asked. He regretted that IMF only ran a political programme in Pakistan and not an economic programme under its three year $6.6 billion Extended Fund Facility (EFF). “How can an institution like IMF go wrong in its forecast and I feel sorry to say that the Washington based international lending agency was only playing politics in Pakistan by wrongly giving positive reports on various occasions.”
He said he had estimated current account deficit at $7 billion against $3 billion to $3.5 billion estimated by the government. “I am afraid this deficit would end up close to $8 billion by June this year,” Dr Khan said, who is currently the Principal and Dean of Social Sciences in National University for Science and Technology (NUST).
“When I (had) predicted all this Mr. Dar said that Dr Ashfaque was doing disservice to the nation by painting a negative picture of the economy. And now I do owe an explanation from the finance minister to tell who is right and can he dare to challenge Moody’s debt figures,” he asked.
Another prominent economist and former advisor to the ministry of finance Sakib Sherani was equally worried about the country’s ballooning external debt and said Moody’s latest report was an eye opener.
“All independent economists had been expressing their concern over rising external debt burden and the country’s ability to pay back its loans,” he said regretting the present government obtained loans after loans that too without any solid justification.
However, he differed with Dr Ashfaque and said external debt would grow maximum $90 billion by 2022 which still spoke volumes about Pakistan’s repayment capability. He termed it a “poor economic management” that has destroyed the economy.
But the criminal negligence, Sherani said, was the wrong policies of the government due to which the export sector has virtually collapsed. “How can you improve external finance without increasing your exports,” he asked. Foreign exchange reserves, he pointed, out were falling and home remittances declining, “both important elements without which you cannot ensure external stability”.
He said imports have increased manifold because of development projects being set up under China Pakistan Economic Corridor Project (CPEC). “Let us hope these projects will have positive effects to achieve increasing GDP growth rate in future,” Sherani added.
“But my main worry is how would any government seek new funding arrangements with IMF, which if this time agrees would surely put serious political conditions that will be detrimental to national security,” he said adding that he has no allusion that the next government would not have any option but to request for yet another bailout package because of fast depleting reserves.
The release of the Moody’s Investors Services’ report is very significant at a time when the government is already confronting grave political issues, though it felt relieved following the settlement of controversial Dawn leaks matter that had serious implications for the country’s national security.
The Moody’s report went on to say that the government’s narrow revenue base weighs on debt affordability and the level of external public debt poses a moderate degree of credit risk. It assessed Pakistan’s fiscal strength at negative “(-) Very Low”, which according to it was hindering debt affordability and increasing the debt burden. Pakistan’s limited tax base restricts its fiscal space, while low savings and shallow capital markets hinder stable domestic financing of sizeable budget deficits.
The government’s debt burden has gradually increased during the last four years from 63.6 percent of GDP to 66.5 percent of GDP as against 60 percent restricted by the Debt Limitation Act of 2005 adopted by the parliament. At 66.5 percent of GDP, according to Moody, the debt stock is higher than the 52.6 percent median for B- rated sovereigns and remains a constraint on Pakistan’s fiscal strength.
It assessed Pakistan’s susceptibility to even risk as “High” driven by political risks and government liquidity risk stemming from high gross borrowing needs, due to the government’s large rollover requirements. Besides this, Moody also projected higher budget deficit for the outgoing year. “We expect that the fiscal deficit will widen further to about 4.7 percent of GDP in the current fiscal and 5 percent in 20017-18,” it said. This is an issue over which independent economists and television commentators have been giving their assessment by saying that fiscal deficit was increasing and that the government must address this issue. But the finance minister remained on a denial mode and it is to be seen now as to how would he respond to Moody’s point of view.
Like the World Bank, IMF and the Asian Development Bank (ADB), the credit rating agency also called for undertaking structural reforms to remove the malaise from the economic and financial system.
In the context of elections, the prime minister’s last week speech made at the inauguration of a metro bus track between Islamabad and a new airport in Fatehjang is inviting more and more criticism.
“There is so much corruption in the country that if we get involved in probing them all our time will be consumed in the investigations and we will not be able to deliver,” he said. By saying so, the prime minister has amply suggested that he is unable to take on corrupt people and as such ignored his fundamental responsibility to expose and punish the corrupt people.
Generally it is said that the current macroeconomic situation will not be judged by CPEC that may offer 8-10 percent GDP growth rate by 2025. But the major issue is the current health of the economy that needs surgery to deliver and seeks more prudent economic path to avoid being caught in any serious macroeconomic imbalance.
Going forward without undertaking fundamental reforms, the real economic turnaround will remain a distant dream. It is time to avoid rhetoric and political gimmickry and listen to international financial institutions which though appreciate economic improvements are urging the rulers and planners to address fundamental economic issues including that of deficits and high debt burden. The job cannot be done through figure manipulation but only through political will and adhering to certain strict financial discipline.
The writer is a senior journalist based in Islamabad
