Pakistan: Dilemma of Policy Planners

I am obliged to share with my readers one of my blogs posted as back as on July 09, 2013, its title was “Pakistan: Dilemma of Policy Planners”. It appears that the situation has not improved in nearly a decade and the country continues to suffer from the same contentious issue and apathy of the ruling junta.

With every passing day the conviction seems to be getting stronger that PML-N government headed by Mian Nawaz Sharif hardly has any sense of priority. Many of its announced plans lack coherence and at the best can be termed wishful thinking and worst of all complacency is based on perceptions rather than ground realities.

The country is suffering from severe balance of payment crisis, which demands following multi pronged strategy, negotiations with International Monetary Fund (IMF) being the top priority. It seems the government has hardly done any homework prior to commencing negotiations with the lender of last resort.

Those at the helm of affairs suffer from the illusion that the United States needs Pakistan rather than realizing the harsh reality that India is being promoted as regional super power and also being assigned an important role in Afghanistan after the pullout of US-led Nato forces.

The entire focus of Senator Ishaq Dar seems to be on mobilizing additional taxes and withdrawing subsidies.  PML-N government has been talking about resolution of circular debt issue by borrowing more but completely ignoring the urgent need to overcome the two most contentious issues: rampant pilferage and poor recovery. Injection of billion of rupees may reduce the debt for the time being but it will reappear soon.

Some of the analysts are of the view that Mian Sahib is surrounded by people having vested interest, seeking funds on concessional terms for establishing power generation facilities. These analysts also believe that another ‘power scam’ is in the making.

To substantiate their argument they say that the country has installed capacity of over 28,000MW but actual utilization hovers at less than half. Therefore, the top priority should be running of power powers at optimum capacity utilization rather than adding new capacities.

Some of the cynics say that Since Dar is an accountant by profession his entire focus is on profit and loss statement and balance sheet rather than achieving synergy, economy of scale and off course there is no focus on restoring confidence of investors.

At present Pakistan is suffering from ‘confidence deficit’ which is even worse than budget deficit and trade deficit put together. Local investors are shy because of looming energy crisis and deteriorating law and order situation.

Mobilizing additional tax without putting the economy on track is ‘hoping against hopes’. Since bulk of Pakistan’s revenue collection comes from indirect taxes, people must have ample purchasing power. Bleak outlook for the economy, eroding purchasing power and shrinking job opportunities forces people not to spend. On top of all failure of the government to contain price hike adds to the woes of masses.

There is an old saying ‘action talks louder than words’ but in case of PML-N there is hardly any action but big talk, mostly blame game. Both Pervez Musharraf and Asif Ali Zardari are being held responsible for the poor state of economy.

People listened to this during the election campaign but now want action to remove some of the malice. PML-N had sought 100 days to put the economy on track but its real challenge will be getting the budget endorsed by the IMF to enter into an agreement with the Fund.

Ironically most of the members of National Assembly can’t comprehend impact of budget proposals and impact of these on masses. They consider clapping their sole duty during the speeches of Prime Minister and Finance Minister and saying ‘I second’ their sole responsibility. In return members are given huge development funds which are mostly spent on development of their home town rather than those areas which need the funds most.

Though, it was expected that collectively ANP, MQM, PPP and PTI will emerge as strong combined opposition, not much has been delivered as yet. Many analysts fear that the present opposition will also be the ‘friendly opposition’ only. Since some of the leading parties have formed government at province, these are effectively part of ruling junta and not the opposition.

 

Saudi Arabia extends term for a US$3 billion deposit to Pakistan

The Saudi Fund for Development (SFD) has extended the term for the deposit provided by the Kingdom amounting to US$3 billion to the State Bank of Pakistan (SBP).

The extension of the term of the deposit is a continuation of the support provided by Saudi Arabia to Pakistan, as the deposit aims to shore up the foreign currency reserves in (SBP) and help Pakistan in facing the economic repercussions of the COVID-19 pandemic.

This also contributes to meeting external sector challenges and achieving sustainable economic growth for the country.

It is worth noting that the US$3billion deposit agreement was signed through the Saudi Fund for Development (SFD) with SBP in November 2021.

The issuance of the royal directive reflect the continuation of the close relationship between the two countries.

Pakistan: Remittances continue to be the biggest source of foreign exchange

Remittances have remained high in June 2022. Eid festivity impact was restricted to the month, the inflow of US$2.5 billion depict a higher rate of remittance. Even though remittances were down 9%MoM, analysts expect growth during the year to remain tepid backed by increase in Pakistani worker registration in GCC countries.

As per Board of Emigration and Overseas Employment (BEOE), around 458,000 Pakistanis have expatriated during 7MFY22TD as against 288,000 and 225,000 during FY21 and FY20, respectively. Most of the expatriations have occurred towards Middle East countries which continue to enjoy better macros in a high oil price environment. 

Notwithstanding a better current account deficit (CAD) in July 2022, the overall Balance of Payment (BoP) position was reported at a negative US$1.8 billion. This is largely owing to the absence of financial flows from any country during the month. 

During June 2022, Pakistan received US$2.3 billion deposit from China while in July 2022 external debt repayments of US$748 million eroded foreign exchange reserves.

Pakistan’s monthly CAD nearly halved during the month under review to US$1.2 billion (3.7% of GDP), despite hefty oil payments as the free-fall in Pak Rupee (fall of 17%) continued to act as a key shock absorber, supported by administrative measures that reduced trade deficit to US$3 billion (21%MoM decline). 

Notwithstanding the fizzling out of Eid festivity impact, rate of remittance flows remained steady at US$2.5 billion for July 2022. 

Trend reversal in PBS-SBP import differential was witnessed owing to oil payments where most shipments, at high crack spreads and as under PBS data, were made during July 2022. Adherence to the renewed IMF program is imperative besides administrative measures to conserve energy in order to keep CAD within the targeted level of US$10 billion (3.0% of GDP).

Pakistan is poised to receive US$4 billion under friendly assistance from GCC countries, which will effectively put its external account at an over-financed status.

SBP has already indicated a pause in tightening with a few downside risks from exogenous factors and deviation from the path of fiscal consolidation. While the end of overheating of economy is in sight (June 2023), Pakistan needs stay adequately congruent to the Fund’s stipulations and implement energy conservation drives to reduce oil import bill.

Trade deficit has come off from its fresh peak of US$3.9 billion to US$3.1 billion, largely owing to demand moderation as well as administrative measures on restricting non-essential items, more specifically the CKD imports.

The biggest decline was seen in machinery and transport group. Infrequent trend reversal in the PBS-SBP import difference was also witnessed during the month, which was primarily on account of higher crack spreads booked in prior month and cash transactions being settled in July 2022. This also kept Pakistan’s average cost of oil import higher than oil prices.

 

Will Pakistan default? May be yes, may be not

Lately, the question is getting louder, Will Pakistan default? The critics are distinctly divided into two groups, one saying may be and other saying may be not. Both the groups have their own premises and none can be termed right or wrong.

I am of the opinion that Pakistan has never defaulted in the past and it will never be allowed to default. As in the past, the country will be bailed out, on the eleventh hour. The IMF and all other multilateral institutions can’t afford an atomic power to commit default.   

I am of the opinion that at present Pakistan does not appear to be a circumstantial defaulter but indecisiveness of the incumbent coalition government, headed by Shehbaz Sharif is making it difficult for the lender of last resort, International Monetary Fund (IMF) to conclude the deal.

Without mincing my words I will say’, “Shehbaz Sharif does not understand gravity of the situation, he acting stubborn and many of his decisions can be termed self destructive”. My premise is based on his consistent refusal to increase electricity and gas tariffs and petroleum price.

I have spoken to some business leaders and even the common man on street says, “Pakistan has no option but to arrive at consensus with the IMF and get the next tranche released”. Saudi Arabia is willing to give US$3 billion, subject to release of the tranche by the IMF. Ironically, Shehbaz and his economic advisory team have failed in understanding this clue.

I tend to support the group which says, “Pakistan has the capacity to avert an eminent default”. The current balance of payment crisis is because of huge imports and paltry exports. The gap is being bridged by US$2.5 billion remittances received every month. Many of the critics fail to understand this blessing. Please recall “IMF has promised to give US$2 billion over the next two years, but overseas Pakistanis are sending US$2.5 billion per month”.

The next step is to curtail import by banning or imposing quantitative restrictions. The incumbent government has decided to curtail import which is praise worthy decision. However, it is committing a horrendous by opting for load shedding of electricity to curtail oil import bill. Outages in the industrial areas are affecting output, raising cost of doing business and eroding competitiveness of the Pakistani exporters.

One of the factors responsible for higher import of food items is rampant smuggling of these products to the neighboring countries. This smuggling can be stopped simply by allowing export of these items to Afghanistan, India and Iran. Both Afghanistan and Iran, also suffering from acute shortage of foreign exchange, are keen in entering into barter trade and/or trade in Pakistani currency.

Please allow me to say that if Shehbaz continue to live under the shadow of Nawaz Sharif and Ishaq Dar, he will sink deeper into the mess. He must listen to his coalition partners and make some difficult decisions. However, he has to get rid of his idiosyncrasies and behave like a real statesman.

Rising remittances prove issuing Eurobonds was a bad decision for Pakistan

In one of my recent blogs I had opposed the idea of flotation of Eurobonds. It was based on two premises: 1) the issue will add to debt servicing and 2) the rate of return being offered is fabulous. I had also suggested that whatever amount Eurobond will provide would be mobilized in less than a month.

A review of remittance received indicates that receipts extended their unprecedented streak for the 10th consecutive month in March 2021 and rose to US$2.7 billion for the month, 20% higher than earlier month and 43% higher than March 2020. 

Cumulatively during first 9 months of current financial year (FY 21) remittances rose to US$21.5 billion, up 26% over the same period of FY20.

Remittance inflows during the period under review were mainly originated from Saudi Arabia (US$5.7 billion), United Arab Emirates (US$4.5 billion), United Kingdom (US$2.9 billion) and the United States (US$1.9 billion).

Proactive policy measures taken by the Government of Pakistan (GoP) and State Bank of Pakistan (SBP) to encourage inflows through official channels, limited cross border travel due to the COVID-19 and orderly foreign exchange market conditions contributed to this sustained rise in workers’ remittances.

I am still concerned about deteriorating balance of trade situation of Pakistan. The deficit during first nine months of FY21 swelled to US$21.241 billion from US$17.352 billion over the corresponding months of last year, reflecting an increase of 22.4%. The surge in trade deficit has been mainly led by higher growth in imports and lower growth in exports.

During the period under review, import bill increased by 14.68% to US$39.91 billion, from US$34.799 billion. This hike was contributed by import of raw material as well as import of wheat, sugar and cotton. As against this, export proceeds rose by 7% to US$18.669 billion, from US$17.447 billion.

I am also inclined to draw a conclusion that Pakistan would have faced serious balance of payment crisis, had there been not so huge influx of remittances. Even IMF tranches and borrowing from friendly countries would have proved too paltry.

Therefore, it is suggested that GoP must look into the problems faced by overseas Pakistani, particularly those living in UAE and Saudi Arabia. Similarly, efforts should also be made to convince these countries to resolve problems faced by Pakistanis.

 

Bailing out Pakistan by IMF or plunging it deeper into debt trap

The critics of Prime Minister Imran Khan are firing all sorts of shots at him. The biggest blame is that the person who didn’t want to approach International Monetary Fund (IMF) has conveniently bowed down rather than making an effort to live without the crutches of lender of last resort. Khan has been critical of borrowing during his election campaign, might be that he failed in understanding the gravity of situation. Let everyone try to find a logical reply to the basic question, will abstaining from borrowing from IMF save Pakistan from committing default? The immediate and logical reply is a big no because the countries that were most likely to extend supporting hands have done the contrary.

Therefore, it is imperative for the ruling regime to strike the best deal and it is also the responsibility of the opposition to help the incumbent government to have consensus on a home grown plan to make debt servicing sustainable. Let PML-N and PPP leadership not forget that they ruled the country for 10 years and supported each other under the much talked about ‘Charter of Democracy’. The country would have not faced the present crisis, had they followed ‘prudent policies’, contained extravaganzas and corruption and supported flight of capital from Pakistan. The ongoing investigations indicate that Pakistanis have parked billions of dollars outside Pakistan, own properties and doing thriving business in many neighboring countries.

After the victory in election, Khan was assured support by United States and Saudi Arabia and told not to approach Iran. Now it is evident that that these countries were willing to extend financial support to Pakistan, only if it agrees to support their geopolitical agenda. The US was prompt in instructing IMF not to lend any money to Pakistan to pay off Chinese debt. The much talked about Saudi oil facility and credit has not come to Pakistan, till this article is going into print. In such a hostile environment Pakistan has no option but to approach IMF and accept its stringent conditions.

Two of the most contentious issues faced by Pakistan are growing current account deficit and shrinking foreign exchange reserves. Therefore, the first target is establishing a ‘lifeline’ before the patient goes into coma and chances of recovery diminish. It may also be kept in mind that issue of ‘Certificate of Health’ by IMF also facilitates in borrowing from other multilateral lenders that include the World Bank, Asian Development Bank (ADB) and International Finance Corporation (IFC). This may also pave way for disbursement of loan by Islamic Development Bank.

Those who do not believe in my narrative, should look at the movement of US$-Rupee parity over the last few days. Till it was not clear that Pakistan will approach IMF and would also receive an encouraging reply, stock market kept plunging and the benchmark index of Pakistan Stock Exchange kept registering erosion of a magnitude that was hardly witnessed in the recent years. However, the situation started reversing after Finance Minister, Asad Umar met IMF Chief. Though, a lot of clarifications are yet to be made, the commitment by multilateral lenders have started pouring in. Someone has said it right that the markets are impervious to emotional appeals, and investors cannot be inspired or persuaded, other than through the cold inducements of gain and loss.

The likely IMF bailout package is certainly not enough to pull Pakistan out of the ‘default like situation’.  However, it offers the space to take corrective steps and put the economy on track. The next but biggest challenge will be to undertake much delayed structural reforms. Almost all the previous governments have promised that while approaching IMF but many failed in fulfilling the commitments.

I will not hesitate for a second in saying that Imran Khan is the propagator of change but he is still surrounded by those who are known for maintaining status quo. Pakistan suffers from ‘confidence deficit’ that is a far bigger threat as compared to budget or current account deficit. What needs to be done is comparatively straightforward and the best path forward can be mapped out quickly as well as the PTI leadership has no shortage of competent people to make Imran Khan’s dream come true.

Khan has a strong social media team that can play a pivotal role in changing the perception, but the real issue is to change the ground realities. What need to be managed urgently right now are the fundamentals not the perceptions. That is where the prime minister’s focus is immediately required.

To put the country on the fast growth trajectory, it is necessary to point out that IMF recipe of raising electricity and gas tariffs, hiking interest rate and withdrawing subsidies could prove fatal blow to country’s economy. It is known to all and sundry that Pakistan suffers from cost pushed inflation that also renders ‘Made in Pakistan’ goods uncompetitive in the global markets. Unless exports are boosted containing current account is not possible. Boosting remittances may bring some additional dollars, but producing exportable surplus and attaining competitive advantage is a must.

PML-N and PPP regimes are known for extravaganzas and wastages; PTI has to follow austerity by discouraging import of luxury items. In a country where a huge percentage of population lives below the poverty line, there is no room for import dog food, luxury cars, expensive mobile phone. Let Pakistan follow the models that enabled Turkey and many other countries to bid farewell to IMF. The citizens of Pakistan ought to thank IMF for the 18 assistance program, but will also have to learn to live within means. It is not difficult but needs solid commitment and support by all the political parties.

Reinvigorating capital market of Pakistan

The newly installed government in Pakistan faces a mammoth task of reinvigorating capital market of the country. This should be among the top five most important items of the economic agenda. The fiscal consolidation requires some other unpopular measures that include: 1) improving tax collection to bridge budget deficit, 2) containing extravaganzas for spending more on development, 3) boosting exports by making Pakistani manufacturers/exporters competitive in the global markets and 4) privatizing state own enterprises to save one trillion rupees which these units swallow annually. Since the role of the government is to facilitate the business community in making fresh investment for the creation of new job, stock exchange is one of the most important institutions that play a key role in the mobilization of capita. An effort has been made to review the factors affecting the performance of Pakistan Stock Exchange (PSX) and suggest the impetus to make it more vibrant. To read details please click http://www.pakistaneconomist.com/2018/09/03/reinvigorating-capital-market-of-pakistan/