Escaping a vicious circle
Many discussions regarding the deteriorating situation of Pakistani economy have surfaced since the devaluation of Pakistani rupee against US dollar in the domestic market. Subsequently, oil prices increased significantly by 9.5pc, which caused uproar within the nation. While some politicians and journalists have started to criticise the last government for this situation and they have, in turn, defended themselves by putting the entire blame on the prior ones, many people are concerned about how Pakistan will run in the future and what steps should be taken to improve this economic blight.
Currently, Pakistan’s economy is going through a rough patch. Some economic parameters are declining while others remain somewhat stagnant. The resultant situation is worrisome as slow economic growth and increasing fiscal imbalance is preventing the government to cater the needs of the growing population.
Pakistani rupee has been devaluing since December 2017 and has lost almost 3.7pc of its value as of now. In December, the value of rupee per US dollar was almost 105 but it observed a steep rise reaching 119.84 in June 2018. This was a great shock to the macroeconomic situation as it gave rise to many more problems our economy is currently facing. According to data combined by Bloomberg, the Pakistani rupee was Asia’s worst-performing currency this year. Some analysts expect the currency to drop further. Standard Chartered PLC predicts that the rupee will fall to 125 per dollar by the end of the year and International Monetary Fund may request authorities to weaken it even further.
Currency devaluation has further speculated that the country might need support from the IMF as reported by the organisation itself according to which Pakistan’s external debt is expected to climb up to 103 billion dollars by June 2019. Pakistan’s public debt would remain higher than the limit prescribed in the revised Fiscal Responsibility and Debt Limitation Act. CPEC related outflows have elevated current account deficit and risen external debt servicing and this may lead to higher external financing needs in the future. The country requires paying $12 billion in first half of 2018 as per its liabilities. Gross fiscal financing needs will likely exceed 30pc of GDP from 2018-19 onwards, in part reflecting increased debt service obligations. All this has led to growing challenges to arrange foreign loans. The IMF also said that “While the level of external debt has remained moderate, continued mobilisation of external financing at favourable rates could become more challenging in the period ahead against the background of rising international interest rates and increasing financing needs”.
Moreover, our foreign exchange reserves are eroding. Foreign exchange reserves held by the State Bank of Pakistan were shrinking by 3pc on a weekly basis, according to data released by the central bank in the month of May. The decrease in reserves was attributed to external debt servicing and other official payments. Reserves have dropped by about a fifth in the past year to reach $13.5 billion. Zubair Ghulam Hussain, chief executive officer at Insight Securities Pvt in Karachi, has said “It was becoming increasingly difficult to manage the local currency at the current level with dropping forex reserves’’. The nation’s current-account deficit had become sizable and foreign debt repayment obligations are also rising. CPEC investments could accelerate the build-up of related external payment obligations, deteriorating Pakistan’s capacity to repay at a faster pace. Furthermore, faster depletion of foreign exchange reserves will have adverse effects on economic growth. A further decline in reserves is predicted even after $2.5 billion of borrowing.
Presently, the caretaker government admits that it is facing daunting economic challenges. The problem which arises here is that the role of caretaker government is largely ceremonial
The World Bank states that Pakistan’s inflation is expected to rise in fiscal year 2018-2019 and will remain high till fiscal year 2020. The outcome of the devaluation of Pakistan rupee against US dollar in the domestic market incidentally coincided with a rise in the crude oil prices in the global market resulting in an upward trend in oil prices from January 2018. The trend will cause an increase in the manufacturing and transportation cost resulting in price hike of all the commodities produced locally.
Apart from this, the country’s economy is facing a sizable increase in current account deficit and fiscal deficit. The IMF states “In the absence of strong consolidation measures, the fiscal deficit is expected to remain close to 6pc of GDP in the medium term, resulting in elevated debt levels”.Current account deficit is expected to remain under stress as the trade deficit is predicted to stay at an elevated level during fiscal year 2018-19. The influx of foreign shipments, however, remains on the higher side due to heavy imports of machinery and other construction material for multi-billion dollar projects under CPEC. On the other hand, balance of payments issue may pose very serious risks to economy during the next fiscal year, mostly because of ballooning deficits and erosion in foreign exchange reserves down the line. Keeping in view the liquidity position, the government may be left with no choice but to cut its non-development and administrative expenditures to reduce fiscal deficit. The State Bank predicts that external and fiscal accounts will remain under pressure because of an increase in import demand and public spending by provincial governments to complete development projects before the upcoming general elections. Pakistan is also facing low levels of foreign direct investment which increased just by 5pc to $2.41 billion in the fiscal year ended on 30 June 2017 as compared to $2.30 billion in the previous year.
However, there is no major change in extreme issues like electricity and gas shortage, unemployment and poverty. The supply of power to industrial and residential consumers is expected to improve considerably with new power plants likely to become operational in 2018 and beyond. Moreover, developments like import of liquefied natural gas (LNG) to improve the shortage of gas for industrial sector and the addition of a second LNG terminal at Port Qasim would go a long way in boosting the economy. Furthermore, recent economic developments have helped country’s GDP growth by 0.8 percentage points over the previous year, touching 5.4pc in fiscal year 2017.
Presently, the caretaker government admits that it is facing daunting economic challenges. The problem which arises here is that the role of caretaker government is largely ceremonial and they are constitutionally given limited decision-making power on major policy issues. Their primary responsibility is to hold elections on time, and to ensure the day-to-day affairs of government continue apace during the interim between successive governments.
Thus the issue of primary importance to be addressed by the new government is to take Pakistan out of this vicious circle. The challenge is to see whether Imran Khan sticks to his vows of not taking any further loan from the IMF or the new ruling party would have no choice but to resort to procuring more heaps of dollars to run the country’s economy.`
Source: https://www.pakistantoday.com.pk/2018/08/01/current-economic-situation-of-pakistan/
