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Sun. December 16, 2018
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The New Pakistan Tehrik-e-Insaaf (PTI) Government and Pakistan’s Looming Economic Crisis
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Pakistan was a developing country faced with a serous looming economic crisis. The size of Pakistan’s economy was only $313 billion and the per capita income only $1640.   The country's share in the global gross domestic product adjusted for Purchasing Power Parity was estimated to amount to approximately 0.83 percent only.  The World Factbook of the Central Intelligence Agency of the US estimate that Pakistan’s GDP was $278 billion only and the country’s comparison to the world stood at 41. .  Another estimate puts the economy at only about $ 305billion and the per capita income at $1548.   Pakistan was in number 32 in the ranking of GDP among 19 countries and the per capita income was only 141 in ranking in the same group of countries. Meanwhile, India was the fifth largest economy of the world.  The estimated economic growth was 5.8 percent for the outgoing fiscal year. The country’s population stood at 207 million.  With a very large youth bulge the country faced a challenge of providing jobs which required even higher economic growth rates. Good governance, a proper economic framework and good economic management would delver the required outcome.  Meanwhile, Pakistan’s economic growth was expected to slow down in the next two years. The latest IMF report stated that the country’s economic growth was an estimated 5.6 percent in FY2018, up from 5.3 in FY 2017.    Economic growth was expected to decrease to 4.7 percent in FY2019 because of a rise in macroeconomic weaknesses and “domestic policy slippages”

Pakistan faced a serious external debt and current account deficit crisis. In March 2018 the IMF calculated that Pakistan’s estimated external debt would reach to a staggering $103 billion by June 2019, up from June 2018 projected level of $93.3 billion. It was estimated that Pakistan’s gross external financing needs at a record $27 billion for the next fiscal year but warned that arranging the financing at favorable rates will now be a challenge due to risks to the country’s debt sustainability.

Pakistan’s needs were expected to rise to around $27 billion by the end of fiscal year 2018-19 (FY19) and would go up to $45 billion by FY23.At that time, Pakistan’s external financing needs will be equal to 10% of the national output. Gross fiscal financing needs will likely exceed 30% of GDP from 2018-19 onwards, in part reflecting increased debt service obligations. The IMF’s calculations had shown a bleak path for the next five years. Public and publicly-guaranteed debt is projected to remain close to 70% of GDP by 2023 under the baseline scenario.

The IMF had then warned that “high levels of public debt and gross financing needs presented significant fiscal risks and needed to be addressed in a timely fashion through fiscal tightening to improve debt sustainability”.

In May 2018 the State Bank of Pakistan (SBP) has reported that Pakistan’s external debt and liabilities had soared to a record $91.8 billion, showing an increase of over 50% or nearly $31 billion in the past four years and nine months.  The external debt and liabilities of $91.8 billion as of March-end suggest that the figure may touch $100 billion very soon as the country faces grave challenges in meeting growing external financing requirements. Pakistan is scheduled to make some bullet debt and interest payments in the last quarter (April-June) of the current fiscal year. The $91.8-billion external debt and liabilities were higher by $30.9 billion or 50.6% compared to the level recorded in June 2013 when the Pakistan Muslim League-Nawaz (PMLN) government came to power. Of the total external debt and liabilities, the government’s public debt obligations including foreign exchange liabilities were $76.1 billion at the end of March 2018. In the past four years and nine months, the public debt-related obligations increased 42.5% or $22.7 billion.  In June 2013, the external public debt including foreign exchange liabilities stood at only $53.4 billion. Since June 2013, the PMLN government has acquired a staggering $42.6 billion in external loans, which is taking its toll on the national exchequer due to the mounting debt servicing cost. Starting from July 2013, with every passing year, the quantum of external debt had kept growing due to the government’s inability to implement policies that could have ensured enough non-debt creating inflows.

Pakistan’s gross official foreign currency reserves as of May 4, 2018 stood at only $11.16 billion. The government took no time in eating up the entire $1 billion Chinese loan received on the second last day of the previous month. The gross official foreign currency reserves of $11.16 billion include loans of $6.13 billion the central bank has acquired from domestic banks to shore up its reserves. By excluding these short-term borrowings, the reserves are almost at the level recorded in June 2013.

Owing to the huge domestic and foreign borrowings, debt servicing was now the single largest expenditure in the federal budget, estimated at Rs1.62 trillion or 30.7% for the next fiscal year 2018-19. A sum of $5 billion was spent on servicing the outstanding stock of external debt in just nine months of the ongoing fiscal year, according to the central bank. The country paid $3.52 billion in principal loans and $1.44 billion in interest on outstanding loans. Pakistan’s external debt as a percentage of foreign exchange reserves increased to a three-year high. Similarly, the cost of external debt servicing as a percentage of foreign exchange earnings increased significantly.  Kamran Haider and Faseeh Mangi in their article “IMF Bailout Looms For Pakistan as Debt Surge Raises Alarm” published in Bloomberg on may 30, 2018 said that: “For many in Pakistan it’s a question of when -- rather than if -- the nation will go to the International Monetary Fund for financial support to pay its soaring foreign debt as reserves dwindle.”  The IMF had projected that external debt and liabilities had climbed 76 percent to $92 billion since June 2013, taking the ratio up to 31 percent of GDP, the highest in almost six years. The country’s debt would continue to climb as it had the highest financing need as a percentage of GDP in emerging markets over the next two years.  The CIA’s World factbook noted that there was now an alarm at Pakistan’s Balance of Payment position because of the great increase in imports and the decrease in exports and remittances.   The IMF’s estimated in March 2018 that Pakistan’s external financing needs were  expected to increase  from $21.5 billion (7.1 percent of GDP) in FY 2016/17 to about $45 billion by FY 2022/23 (9.9 percent of GDP). Recently, CPEC related imports and the increased oil prices had led to increase of the current-account deficit, the dwindling of the foreign exchange reserves, and the   weakening of the Pak Rupee to 128 to a US dollar. This had caused a problem because it made Pakistan’s debt more expensive.

The CPEC deals lacked transparency and the new PTI Government had promised to place all those agreements in the parliament very soon. A restructuring of the unsustainable CPEC was possible. Today, Pakistan was in contact with the Islamic Development Bank (IDB), China and Saudi Arabia to acquire financial assistance, to stabilize its foreign currency reserves and end the balance of payments crisis.  Pakistan was expected to receive $7 billion in emergency support.  Pakistan was now facing a very serious current account deficit crisis. Earlier, in 2013 when the PMLN government came to power the current account deficit was $2bn a year. Today, the current account deficit had increased to a staggering $2bn a month. Asad Umar, future finance minister said on August 2018 that this was a 12-fold increase and was unsustainable. “Given that, the most urgent action required of the government will be to deal with this crisis.”

Today, Pakistan’s current account deficit  had increased to an shocking $18 billion. Meanwhile, the foreign currency reserves were only enough to cover less than two months of imports.  Earlier, in 2017 the debt burden carried by Pakistan had reached levels which had then aroused concern in the Asian Development Bank (ADB) and the IMF.    In the previous fiscal year (2017-18), the budget deficit had increased to 6.8% of GDP or Rs2.3 trillion. In absolute terms, it was the highest-ever budget deficit recorded in Pakistan’s history.  The previous PMLN government had set the budget deficit target at 4.1% of GDP, which had been breached by a wide margin. Historically, the budget deficit and current account deficit were major reasons behind seeking bailout packages from the IMF. For this year, the last parliament had approved a budget deficit target of 4.9% of GDP or Rs1.9 trillion. But, the initial trends were not positive. The budget deficit in the first month of the new fiscal year was close to Rs150 billion or 0.4% of GDP, significantly higher than the one recorded in the same month of the last fiscal year.  Higher interest payments were the main reason for excessive spending in July. Interest payments in July alone had amounted to two-thirds of the total spending, indicating that controlling current expenditures would be an uphill task for the PTI government.

The last National Assembly had sanctioned Rs1.62 trillion for debt servicing in the ongoing fiscal year and about 15% of that has already been consumed in a single month. Meanwhile, the country’s foreign currency reserves were expected to again fall below $9 billion mark by the end of September, even after Pakistan had secured a $2 billion official inflow from China and arranged $1.4 billion commercial loans over the past two months.  One of the most important failures of the previous PMLN   government was the inability to meaningfully increase the tax-to-GDP ratio which was 10% in 2013 to only to 12.5% in 2017. 

Today, the Pakistani rupee is shaky, the tax collection is miserably low. In 2017 , less  than a million people had paid any taxes. Meanwhile, the country was only  recently returned to the FATF “gray list” for failing to control terrorism financing, which now made foreign transactions more complex and expensive. 

 Most probably, the new PTI government would be going to the IMF for a bailout which would only come if the notorious “conditionalities” were met. The conditionalities mostly would mean further governance reforms and raising taxes which was a good thing. The problem was that the IMF would also want decreasing state expenditure on social programs and decreasing subsidies.   

Another challenge facing the new PTI government would be the stagnation of the Public Sector Enterprises (PSEs) and the high circular debt of the electric power generation companies. Today, the total losses of all the PSEs had exceeded Rs1.2 trillion (4 percent of GDP), and the circular debt was a staggering Rs 573 billion on May 30, 2018.  How the PTI government tackled these issues remained to be seen. Meanwhile, Pakistan had come under increasing pressure to comply with 40 recommendations of the Financial Action Task Force (FATF).  To avoid further down gradation from a grey to a black list through the upcoming evaluation by the Asia and Pacific Group (APG), key institutions had come up with a detailed plan to achieve desired results.  The APG was scheduled to visit the country from August 13 and evaluate the progress. Pakistan’s key stakeholders including the Ministry of Finance, FMU, SBP, Nacta, FIA and FBR’s Intelligence and Investigation would be required to play a significant role -during the visit of the APG. To comply with the FATF demands, Pakistan had prepared the following immediate outcomes:

1.            Money laundering and terrorist financing risks are understood and, where appropriate, action must be coordinated domestically to combat money laundering and the financing of terrorism and proliferation.

2.            International cooperation delivers appropriate information, financial intelligence and evidence, and facilitates action against criminals and their assets.

3.            Supervisors appropriately supervise, monitor and regulate financial institutions for compliance with AML/CFT requirements commensurate with their risks.

4.            Financial institutions and DNFBPs adequately apply AML/CFT preventive measures commensurate with their risks and report suspicious transaction.

5.            Legal persons and arrangements are prevented from misuse for money laundering or terrorist financing and information on their beneficial ownership is available to competent authorities without impediments.

6.            Financial intelligence and all other relevant information are appropriately used by competent authorities for money laundering and terrorist financing investigations.

7.            Money laundering offence and activities are investigated, and offenders are prosecuted.

8.            Proceeds and instrumentalities of crime are confiscated.

9.            Terrorist financing offences and activities are investigated and persons who finance terrorism are prosecuted and subjected to effective, proportionate and dissuasive sanctions.

10.          Terrorists, terrorist organizations and financiers are prevented from raising, moving and using funds, and form abusing the non-profit organizations (NPO) such as NGOs sector.

11.          Persons and entities involved in proliferations are prevented from raising, moving and using funds in accordance with the relevant United Nations Security Council resolutions.

It is an imperative that the new PTI government immediately ensure compliance of FATF demands. Pakistan needs to gain the trust of the international community to ensure a good deal with the IMF. The country’s need foreign help to stabilize its economy and therefore must take quick action in this area. Plus, it is in Pakistan’s national interest to eradicate the menace of money laundering and terrorist financing quickly.  Much was now expected from the new PTI government. The new PTI government must also try its best to improve relations with India. Peace with India will decrease the tensions in South Asia and provide Pakistan with access to the growing Indian market It was time for a new beginning. Indeed, a new era had begun in Pakistan and bold policy measures were now required. Pakistan must focus on the development of its human resources, sustainable economy and the eradication of poverty which can only happen if bold policy decisions are taken now. The PTI government can only fail at its peril.  The people hoped for change and it was now time to deliver. It was an imperative to set the right direction at the beginning of the five-year term.  There was hope in Pakistan now.

Dr. Sohail Mahmood is an Independent Political Analyst based in Chapel Hill NC.

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