Money Matters

Back to begging!

April 23, 2018
By Mehtab Haider.

The stage is set for picking up the begging bowl again and requesting another bailout package from the International Monetary Fund (IMF).

INSIGHT

The stage is set for picking up the begging bowl again and requesting another bailout package from the International Monetary Fund (IMF).

The decision would be taken as soon as the Pakistan Muslim League-Nawaz (PML-N) regime ends its tenure next month.

Last week, Pakistan’s delegation, led by Miftah Ismail, advisor to the prime minister on finance, participated in the spring meetings of the IMF and the World Bank in Washington DC. The possibility of making any formal requests for a bailout package had been ruled out during this event.

The PML-N is nearing completion of its tenure. The incumbent regime is going to leave its office after a month and 10 days. It does not have any mandate to strike any fresh deal with the IMF.

Similarly, the IMF would not finalise any fresh package with an outgoing regime for obvious reasons that an outgoing government cannot make commitments on behalf of an incoming government.

Advisor to PM on Finance Miftah Ismail might have discussed the possibility of seeking another package in background discussions and conveyed signals for approaching the IMF after placement of a caretaker setup. However, the IMF would prefer to finalise a deal when the new government would be sworn in after winning the next general elections, as the new regime would have the mandate to undertake the required crucial, but difficult reforms.

At the moment, Pakistan has entered into a full-fledged crisis by plunging into twin deficits - the yawning budget deficit and current account deficit in the outgoing fiscal year.

The current account deficit had crossed $12.02 billion mark in the first nine months (July-March) period of the current fiscal and widened 50 percent compared to the same period of the last fiscal year.

Last year, the Finance Ministry had forced the Planning Commission to slash down the projections of the current account deficit (CAD) after which the target of CAD was projected at over $10 billion. In the aftermath of holding post programme monitoring (PPM) talks with the IMF, the CAD target was revised upward for the current fiscal year.

Now the budget makers are in the process of finalising macroeconomic framework for preparation of the next budget 2018-19 and also revising important macro figures for the outgoing fiscal year 2017-18. For this, approval would be sought from the highest economic decision making forum of the country, the National Economic Council (NEC) scheduled to meet under the Chairmanship of Prime Minister Shahid Khaqan Abbasi on Tuesday, April 24, 2018.

After the passage of nine months, the government has revised upward the projection of CAD and estimated to go up to $15.3 billion for the outgoing fiscal year 2017-18, while they had projected that the CAD would be lowered close to $14 billion.

The planning and finance managers are expecting that the trade gap will be narrowed down because exports growth will continue picking up while imports will be slashed down massively in the wake of reduction in imports of machinery and other material from China after completion of energy projects. It will be hard for the country to achieve growth in exports in the next fiscal when there will be higher base in the range of double digit. This year, growth picked up slightly in exports after continuously falling over the last couple of years.

This clearly points to the fact that the China-Pakistan Economic Corridor (CPEC) will slowdown in the next financial year, despite continued political rhetoric that it is a game changer for Pakistan.

Among the many economic challenges that Pakistan faces, the increasing current account deficit would not have been a problem if those at the helm of affairs were able to manage its financing. It is problematic for the country because the managers are unable to finance it without debt creating inflows.

Pakistan’s economic worries continued to multiply as foreign debt increased while foreign currency reserves declined simultaneously, posing threat that a balance of payment crisis would emerge sooner or later.

The same is happening again leaving no other option but to knock at the doors of the IMF in Washington after few months.

The mother of all economic ills starts from increasing budget deficit because it ploughs the seeds of macroeconomic instability and also pushes demands for increasing gap on external fronts. When the country fails to finance its growth through internal savings it is bound to rely upon external savings. So, the crisis starts following the inability to manage internal accounts properly.

With expected revenue shortfall on account of the Federal Board of Revenue (FBR) and non tax revenue as well as expenditures overrun, the budget deficit might shoot up and go close to six percent of the gross domestic product (GDP) for the outgoing fiscal year 2017-18 against 5.8 percent of GDP for the last fiscal year 2016-17. If the caretaker setup decides to keep the monster of circular debt on official books then the budget deficit may shoot up close to eight percent of the GDP till end June 2018. However, the economic team still claims that the budget deficit will be restricted at 5.3 to 5.4 percent of GDP for the outgoing fiscal year.

Insiders at the Q Block insist that the presence of an incapable economic team sitting at the helm of affairs at the Ministry of Finance poses serious threat. They allege that the team may not be able to control both twin deficits, including the budget deficit and current account deficit.

It is tragic that many economists deliberately give wrong prescriptions to please those who are at the helm of affairs. They always stand in the queue of job seekers, so they please their masters by presenting a rosy picture.

Recently, a renowned economist who is among the strong contenders of the future caretaker setup told western diplomats in Islamabad that Pakistan’s economy would be touching $1,000 billion size by 2025 with the help of the CPEC. Our ruling elites and institutions started thumping with joy on hearing the pleasant news, all the while hating those who tell the realities on the ground.

Without an iota of any doubt, Pakistan possesses immense potential but it will have to come from the boom- bust cycle by achieving higher trajectory of growth for at least 10 years without any interruptions. For turning this dream into a reality, Pakistan will have to undertake prerequisite steps by removing structural bottlenecks on every front of the economy. For financing this higher growth, the country will have to mobilise domestic resources in terms of boosting tax to GDP ratio, investments, and savings in percentage of the GDP. If it does not happen, no magical force would be able to steer the economy out from crisis mode and mess on permanent basis.

When contacted, former finance secretary Abdul Wajid Rana said, “Economic fundamentals are weaker than these were in 2013. The fiscal deficit inclusive of circular debt is expected to be closer to what it was in June 2013 and current account balance is worst off as compared to June 2013 (five percent versus one percent of GDP) which clearly speaks of economic management during the last 5 years.”

The finance secretary concluded, “The weakening overall balance of payments needs appropriate employment of fiscal and monetary instruments available at the disposal of government as well as charting out contingency plan to deal with transition through election and post-election situation.”

It is evident that the government, to get out of the difficult situation has to take tough decisions. In the absence of such strong will, Pakistan will continue to incur debt and a balance of payment crisis sooner or later.

The writer is a staff member