Balance of payment position worsens

ISLAMABAD: Pakistan’s financial account has turned negative of $1.33 billion because of over $300 million outflow from the capital market, heavy repayments of outstanding loans and dried up project financing from multilateral and bilateral creditors.

The commercial banks withdrew around $850 million in the first four months, so the overall financial account has turned into negative.

Despite thumping with joy over the Current Account Deficit (CAD) turning from deficit to surplus during the first four months of the current fiscal year, the overall Balance of Payments (BoP) position has worsened as Islamabad is left with no other option but to revive the stalled IMF programme of $6 billion under the Extended Fund Facility (EFF). The IMF programme was put on halt in February 2020 in the aftermath of outbreak of COVID-19 pandemic. However, the IMF had extended $1.4 billion under the Rapid Financing Instrument (RFI) to compensate Pakistan for mitigating the negative effects of coronavirus.

The reputed Economist Magazine, London, in its latest edition had predicted three Asian economies facing risks of default on external loans and obligations, including Pakistan, Sri Lanka and Mongolia. On Pakistan, the Economist Magazine stated that in order to avert default, Pakistan would have to seek a rollover of Chinese loans and would have to take steps to revive the IMF programme.

Although, Adviser to PM on Finance Dr Abdul Hafeez Shaikh had claimed last month that the IMF programme would be revived soon yet so far Islamabad has not taken the required steps to pave the way for revival of the halted IMF’s $6 billion Extended Fund Facility.

The balance of payments position deteriorated despite the fact that the multilateral creditors such as the World Bank and Asian Development Bank provided more generous help to Islamabad through budgetary support despite the stalled IMF programme.

Now another risk seems to be emerging as the oil prices in international market are rising, which will add extra burden of $1 to $1.5 billion on the economy of Pakistan. The import of cotton, wheat and sugar is going to burden the economy with an additional $4 billion into import bill, so the surplus CAD might turn from surplus into negative by the end of the ongoing fiscal year.

When the Ministry of Finance high-ups were contacted, they replied that efforts were underway to convince the IMF for kick-starting review talks within the ongoing month to evolve a consensus for moving towards an agreement on the second review and release of third tranche worth $450 million.

The tough steps required for revival of IMF programme included raise in power tariff, elimination of stocks and flows of circular debt and taking additional revenue measures for achieving the FBR target of Rs4,963 billion. Currently, the circular debt is expected to go up in the range of Rs550 to Rs600 billion in case of the existing status quo against the last fiscal’s Rs500 billion increase.

Former finance minister Dr Hafeez A Pasha suggested to the PTI led government and opposition alliance Pakistan Democratic Movement (PDM) must evolve a consensus for the tough measures and revival of the IMF programme.

The revival of the IMF programme, Dr Pasha said, was imperative as there was no other solution to avert the crisis that will start looming over the economic horizon over the next few months period, especially during the second half (Jan-June) period of the fiscal year 2020-21.

This scribe also sent out questions to the Chief Spokesman State Bank of Pakistan, Abid Qamar, who stated that the current account balance recorded a surplus of $1.16 billion during the first four months of FY21 as compared to a deficit of US$1.42 billion during the same period last year.

This surplus in current account balance implies that there was no incremental need to mobilize/borrow funds from abroad by the private sector. This situation allowed the private sector to retire some of their earlier borrowings. This is recorded as an outflow from the financial accounts.

He further stated that the COVID-19 outbreak and resultant uncertainty in global financial markets led to capital flight from emerging economies. In line with the global trend, portfolio investment in Pakistan also recorded a net outflow of $341 million during Jul-Oct FY21, against a net inflow of $564 million during the corresponding period last year. “The financial inflows of the public sector (including SBP) recorded net positive inflows during the first four months of the year,” the chief spokesman SBP said. As for specific details of project loans, MoFA/ EAD may be in a better position to comment on this, he concluded.