Insight
With the increasing political temperature in the aftermath of Panama verdict, Pakistan’s economy is heading towards facing internal and external imbalances at an accelerated pace.
In the prevailing scenario, it is important to take the decision in a timely manner otherwise the economy would be standing exactly at the same position in 2018 where it did in 2013 when the Pakistan Muslim League-Nawaz (PML-N) took charge after the elections.
The fiscal deficit stood at 8.8 percent of gross domestic product (GDP) in 2013 and it was brought down to 8.2 percent of GDP by making adjustments. The foreign currency reserves held by the State Bank of Pakistan (SBP) stood at $6 billion and after taking into account swaps, the net SBP reserves were just $4 billion. Then Ishaq Dar managed the International Monetary Fund (IMF) programme and foreign reserves were built up and even touched $24 billion of both the SBP and commercial banks. The budget deficit was brought down to around four percent of GDP in the first three years, but it again shot up to 5.8 percent of GDP for the last fiscal year 2016-17.
One should praise the performance achieved by the economic managers and Federal Board of Revenue’s (FBR) top management for materialising almost 20 percent growth in tax revenues, and collecting non tax revenues. This helped the finance ministry curtail the budget deficit at 0.9 percent of GDP in the first quarter of the current fiscal against 1.3 percent of GDP in the same period of the previous financial year.
However, if the economic managers deliver on the budget deficit by sticking to curtail it at five percent instead of four percent of GDP envisaged on the eve of budget 2017-18, it would not be less than a miracle, especially in an election year when the spending spree both at federal and provincial levels gear up momentum in months ahead.
The real challenge for the economy lies on the external front as the current account deficit widened to $12.2 billion in the last fiscal year, and already has surpassed the $2.2 billion mark in the first two months of the current fiscal year.
The government imposed regulatory duty on 376 tariff lines last week to slash down trade deficit. This decision should have been taken two months back, but it was delayed which had an impact on the country’s economy.
However, two latest happenings are lethal for the country’s economy. It is really a lethal combination for the story the economic managers are going to narrate before international audience next month for luring investment for upcoming Sukuk and Eurobonds with the expectation to get multibillion dollars inflows in order to avert balance of payment crisis just ahead of electioneering fever gripping the country after a few months.
The country’s economic wizard Ishaq Dar has been facing trial in the National Accountability Bureau (NAB) court, and has had not much time to focus on the fragile economy especially on the external front.
Two other things happened simultaneously that had a far reaching impact. One blow for the economy is from outside in the shape of the World Bank (WB) report, estimating gross foreign financing requirement to over nine percent of GDP for the current fiscal year. The economic managers are in a state of shock with this sudden blow and are considering different remedial measures to avert its negative sentiments for Pakistan’s economy.
The second blow was more severe when the most power institution of the country, military establishment along with the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), arranged a seminar in Karachi, where chief of army staff (COAS) Qamar Javed Bajwa threw light on internal and external challenges being faced by the economy. While praising higher economic growth, the COAS dwelt upon the challenges on fiscal side and also talked about widening of the current account deficit in the context of ensuring security of the country.
Later on, the director general of the Inter-Services Public Relations (ISPR) lieutenant general Asif Ghafoor also commented that if the economy was not in bad shape it was also not in good shape.
On this statement, federal interior minister who also holds the portfolio of minister of planning Ahsan Iqbal responded in harsh words. There was finally ceasefire and truce was struck as the top economic managers gave an extensive briefing to COAS about the country’s economy.
This negative sentiment might have blown into full swing, especially when the World Bank report overestimated the gross financing requirement at $31 billion. The same as when the reserves were depleting in the wake of rising trade and current account deficit as well as dried up foreign inflows from all other avenues.
This report was made public just ahead of the annual meeting of the IMF/World Bank arranged at Washington DC from October 10 to 15. Pakistan’s delegation, comprised of finance secretary, State Bank of Pakistan governor, and Economic Affairs Division secretary, raised the issue in the strongest wording and said that “the World Bank had destroyed Pakistan’s story,” by presenting this report.
However, the World Bank official of South Asia argued that they had never stated such thing in writing in their report, and estimates were made related to gross financing gap by showing that it stood at nine percent of the GDP.
The delegation from Pakistan argued that their (World Bank) estimation was wrong by all international standards so it should be rectified. They further told the World Bank that they were planning to approach international markets for launching bonds including Sukuk and Eurobonds so with such over estimation no one would be interested in investing their money in the paper.
There is huge liquidity in the international market and countries like Bahrain, Iraq, and Egypt as well as Pakistan should exploit this situation by getting favourable interest rate for generating a few billion dollars next month.
We cannot delink economy from politics but there is need to avoid political tricks at the cost of the economy. If Pakistan failed to muster the desired support at the international level in terms of luring investment at favourable rates, then there will be no other option but to seek another bailout package from the IMF. This time the cost of the IMF programme will be much higher in terms of tough conditions.
The writer is a staff member
