The path towards sustainable growth

­“Pakistan’s current account deficit will not decrease because the country’s imports are inelastic! The dollar will trade at Rs 185 by June 2019 because it has been settled with the IMF! Pakistan’s economy is contracting!” The above mentioned statements are just few examples of the wild claims that were repeatedly made by some commentators in the past. All turned out to be false.

Now the current account deficit is down by 73% Jul-Nov 2019. This is on top of a 32% decline achieved in the last fiscal year. The market driven currency is stable at Rs 155 to a dollar since June 2019. The economy grew at 3.3% during last FY and although the projections vary, it is expected to grow close to this figure during the current year too.

Pakistan faced a real prospect of a full blown crises and default in 2018 by the time PMLN government had left office. The current account deficit had reached $20 bn from $ 2.5 in 2013 due to deficit financed and consumption driven growth. The external debt servicing obligations had almost doubled to more than $ 10 bn per annum as the bubble was kept inflated by depletion of forex reserves and expensive commercial loans that now require repayment. As a result, SBP’s net forex reserves (clear of short-term liabilities) were just under $3 bn whilst the external financing requirement of the country for the year stood at ten times more i.e. $ 30 bn.

The economic journey that started from disaster circumvention and ended with sustained economic growth has to by necessity pass through the arduous and testing fields of economic stabilisation. And indeed, the turn-around from the inherited crises towards economic stabilisation is remarkable. The current account is expected to remain in the range of $ 6-8 bn as compared to $ 13 bn last year and USD $20 bn when the PTI took over. As per Customs data, the import compression has been led almost entirely by a decline in import of dutiable/taxed goods as opposed to duty free goods that are considered essentials and attract no taxes on their imports. On the other hand, the exports grew by 12% in volume in FY 18-19 and this year we are witnessing an accelerating growth of exports in dollar terms as well. As per SBP data, the exports of goods in USD rose by 4.8% from July-Nov this year with the growth momentum accelerating in last 3 months (+5% in Sep, +7% in Oct and +11% in Nov).

The rapid depletion in the SBP’s forex reserves was largely plugged by January 2019. The target has since been of a build-up in reserves and retirement of short-term liabilities of SBP i.e. credit swaps. This build-up is essential to create a buffer against any shocks, to finance imports and to undertake external debt servicing obligations. From July-Nov this year, SBP reserves posted an increase of $ 1.8 bn and reduction of $3 bn in forex swaps. This amounts to a significant net increase of $ 4.8 bn in Pakistan’s forex buffer held by SBP. This build-up has so far been achieved despite much greater external debt servicing and also lesser increase in our own external debt stock when compared to preceding years.

The nature of external debt being undertaken is also different. A greater reliance is now being placed on concessional lending from multilaterals with lower interest rates and much longer maturity periods. It is important to note that Pakistan had no commercial loans in its external debt stock in 2013. However by 2018, 11% of Pakistan’s outstanding debt portfolio was composed of expensive commercial loans with short maturity periods. Excessive resort to this form of borrowing, especially from 2016 and onwards is largely responsible for the doubling of annual external debt servicing obligations of Pakistan. Our new debt management now envisages to reduce this share of commercial debt in external debt stock by focusing more on concessional and long term borrowing.

From 2013 till 2018, Pakistan’s imports grew by 33% whilst exports posted negative growth. In terms of percentage of GDP, exports declined from over 13% to under 9% of GDP. Meanwhile, the over-valued exchange rate during this period was not just fixed but actually appreciated in real terms. So at a time when the trade deficit and current account balance of the country were worsening, our currency was appreciating on the back of depleting reserves and expensive commercial loans.

Thus, the PTI government resolved to undertake a bold reform of the exchange rate management system. Instead of squandering away billions of precious foreign exchange in keeping our currency overvalued (thereby also subsidising imports and pricing out our exports from world markets), the currency levels are today market driven requiring little to no forex interventions.

The currency has now stabilised and adjusted itself in this new mechanism as result of market forces and not due to State Bank’s interventions. This is a marked departure from the past and has also restored exporter’s competitiveness and allowed import substitution to become feasible in the country. It has also allowed the State Bank to preserve and build up its foreign currency reserves.

On the fiscal side, tax revenues are growing at 16.9% in the July-Nov period. This growth in tax revenues is qualitatively very different from the previous years. It is taking place despite a policy of import compression and is being led by domestic tax collection that is itself showing a growth of 28.4%. The FBR collects close to 50% of revenue from multiple forms of taxes levied at import stage. This high proportion of imports based collections is far above our regional peers and manifests as a structural issue on its own.

As imports have decreased, the taxes collected under most of these heads have also declined. In the past, especially during PML N period, taxes of varying forms were disproportionately levied at the import stage. That combined with a radical growth in imports became the main driver of revenue growth.

The PTI government on the other hand has taken a diametrically opposite approach and in the last 15 months has removed or reduced taxes on the import of nearly 2000 tariff lines composed of industrial inputs or raw materials. And it continues to focus on improvements in domestic tax collection as the numbers above show.

All of the above measures have undoubtedly stabilized the economy and allowed it to escape from the jaws of a deep crises it was headed towards when the PTI government took office. As a result of this stabilisation and other reforms, some confidence building endorsements have been received. The international ratings agency Moody’s international has upgraded Pakistan’s rating. The country has climbed 28 places in the World Bank’s ease of doing business index making it one of the top global reformers in this regards. The stock market has rallied more than 11,000 points since August 2019. The Current Account deficit whilst following it downwards trajectory saw a surplus in the month of October. The return of foreign portfolio investment after 3 years into Pakistan also signals growing confidence in the stabilisation process.

As the gains of stabilisation are further solidified, adequate buffers put in place and inflationary pressures recede as per forecasts, the economy will begin shifting gears and move from stabilisation into a higher growth phase from the next fiscal year. In order to escape the boom and bust cycle that has for decades characterised Pakistan’s economy, it is essential that we now focus on sustainable growth. The key word here being ‘sustainable’. Such a form of growth, in order to be long lasting, will have to be associated with a corresponding growth in exports in order to avoid a balance of payments crises. And driven by rising investment levels, not just consumption. It also has to be associated with the continuation and commitment towards a market based exchange rate and a higher tax to GDP ratio that anchors this forward momentum within a balanced growth path. The countries of east Asia and China transformed themselves by continuous economic growth over an extended time span. In Pakistan, consumption bubbles formed by financial indiscipline that ultimately lead to economic crises have been masqueraded more than once as a success of economic policy. Our country deserves much better!

Pakistan is the sixth largest country in the world with a young population and tremendous natural resource. The sustained economic growth for us holds the potential of not just enriching millions of lives. It will propel Pakistan to attain a pivotal role in the global economy. The PTI government will continue to roll out reforms and remains committed to the path that leads towards this objective.

The writer is the Minister of Economic Affairs, Government of Pakistan.