Dealing with Economic Emergency By Syed Ali Imran
Pakistan is facing pressure on its external liabilities. The financing requirement for FY23 is around USD 33.50 Billion, which includes repayment of external debt liabilities and bridging the gap in the current account deficit. After being downgraded by international credit rating agencies, speculations of Pakistan’s default on external debt repayments became headlines. It was being considered as a default case scenario like Srilanka. This is due to political uncertainty inflicted after the Vote of No Confidence (VNC) against Mr Imran Khan’s government in early April this year, which was then replaced by the PDM regime having multiple political parties with the decades-old hereditary style of formation. It is important to mention here that Srilanka was experiencing such a situation where one family was ruling the country. PDM’s slogan to oust Pakistan Tehreek e Insaf (PTI) was to rescue the public from inflation whereas Mr Imran Khan claimed the situation is created on an imported agenda to curb Pakistan from making independent decisions for its future.
As soon as PDM came into power, its Ministry of Finance (MoF) claimed that a tranche from International Monetary Fund (IMF) is important and blamed PTI for not following conditions imposed by IMF. Due to such mistrust, Fund is reluctant without solid assurance for future behaviour of the Government of Pakistan (GoP). During such tenure, China initially did not roll over its SAFE deposit after regime change and this outflow further impacted the Foreign Exchange (FX) position of Pakistan, which led the Pak Rupee to depreciate considerably against the US Dollar. In June however, China re-deposited $2.27 Billion but the free fall of the Pak Rupee did not stop. Interbank first time crossed Rs.240 approx. per Dollar even following news of draft staff level agreement with IMF. PDM MoF initially stated after its first meeting with the IMF that the fund doesn’t see a near default situation. However, while increasing petroleum and energy prices, PDM’s MoF claimed that PTI betrayed IMF on Fuel subsidy and they needed harsh decisions over the economy, which would hurt their political career. Then, Pakistan witnessed historic high prices of fuel and energy, which led to a significant increase in inflation resulting in a discount rate to jack up. While making such observations, Mr Miftah Ismail shared the Economic Survey of Pakistan period related to PTI performance in which it was clearly stated that GDP touched six per cent growth whereas the country achieved above five per cent GDP growth for consecutive two financial years even though Global Economy had slowed down due to pandemic impact.
Recently, the State Bank of Pakistan (SBP) stated that Pakistan is not among the most vulnerable countries in the world whereas Pakistan’s $33.5Billion external financing needs are fully met for FY23. It provides a very optimistic view. However, the Economic Survey of Pakistan also states that the GDP was growing at a decent pace with economic indicators being presented as under control. It is important to mention here that SBP is enjoying autonomy after a bill passed from the National Assembly in the PTI regime. Therefore, it presents a logical and independent view. Apart from all figures and justifications, it is also an important fact that Pakistan’s external liabilities are swelling with such growth and it needs an economic emergency with full centric control on internal and external economic activities. Hence, it needs some urgent steps toward reviving the economy of Pakistan broadly divided into four main components; Debt Repayments, Twin Deficits i.e. Current Account Deficit (CAD) & Trade Deficit, Fiscal Deficit and Foreign Exchange (FX) Reserves. The next part of this article will discuss some urgent steps required to avert this economic downturn. Starting with Debt Repayments, Pakistan needs a strong face of the Government, having full power, to negotiate with international financial institutions and friendly states for immediate debt restructuring/rescheduling so that it may get a reasonable relief period to pick up momentum towards exports and remittances. Meanwhile, the world is sinking into a possible recession that can go longer than 12 months. Deferred payment facility for oil and energy together with food and medicine from Russia, China, and Saudi Arabia can further delay the payment obligations.
If we observe consumer preferences, we as a nation do not even use water purified by our local facilities, but buy it from multinational brands.
Current Account Deficit (CAD) is a major factor due to which Foreign Exchange Reserves are depleting and requires external financing. Due to depleting reserves, the Pak Rupee’s value against the Dollar is on free fall. CAD stood at $ 17.5 Billion i.e. 4.6 per cent of GDP in FY22. It is a notable fact that overall economic activities increased in this period including imports, exports and remittances if one may compare it with FY18 when it peaked at $19.2 Billion. However, after VNC, economic activities halted due to political uncertainty. CAD can be controlled when the Balance of Payment from import and export activities may be positive. The balance of payment crisis starts when apart from necessary machines or raw materials for industrial production or lifesaving drugs a country starts importing items that may be available locally. It could be fast-moving consumer goods or home appliances or cars etc. Merely increasing import duties cannot stop this large segment for long.
Promotion of local brands can lead to abstaining from such imports, which need some quality control assurances from government institutions. These institutions are already available, but corruption becomes a massive hindrance and stops them from working properly, thus allowing multinational companies to enter the local market. If we observe consumer preferences, we may see that we as a nation do not use even our water, purified by our local facilities, but buy multinational brands selling the same thing. On an immediate basis, quality and price control departments to become effective so that local brands may be a trustworthy and fair competition to be developed between imported, MNCs and local brands. It will control FX drain whether it may be a car, mobile or food and beverages.
For MNCs, laws need to be amended for input material and dividend outflows. For input material, it should be made binding on MNC to utilize local inputs or if such quality may not be available then give a short time frame when technology may be transferred to Pakistan to attain such quality. Further, it should be binding on MNCs to stop dividend outflow every year for the next five years. And after five years, 10 per cent of the first year and 50 per cent of the sixth year dividend outflow may be guaranteed. These two steps will control FX outflows immediately and MNCs will not be discouraged as well. Sponsors of these MNCs to transfer technology to Supplier Credit Facility so that immediate FX outflow may be avoided.
Ban all imported goods related to luxury items including CBUs of cars, mobiles, and home appliances together with food and beverages and other non-productive items where import substitution is available in Pakistan. Exporters may be asked to hedge the maximum of their imports with that of export proceeds where importers to be encouraged to establish Usance/Deferred Payment Letter of Credits for which the Ministry of Foreign Affairs to take lead in negotiating with friendly states from where Pakistan imports; mostly like China. Likewise, exporters may be encouraged to negotiate sight payments so that early export proceeds may give a boost to foreign exchange. Due to country risk, such negotiation will require active participation on the G2G level.
Exporters need Tax refunds, cheap credit facilities from banks and regionally competitive energy prices. For tax refunds, an allocation of budget is required, which may be a little difficult for any government to arrange however export refinance facility should be available at lower rates rather than link it with a discount rate whereas a long-term refinance scheme may be abolished as sufficient capacity enhancement has been executed in FY21 and FY22 by exporters. For Regionally Competitive rates of energy first of all energy procurement on lower rates and deferred payment basis are required i.e. from Iran, Russia and Saudi Arabia. Moreover, it is important to utilize Daylight saving where a strict policy on Offices and Market timing is placed. Four working days a week strategy should be implemented so that fuel for electricity may be saved and industries may be supplied with uninterrupted electricity.
IT exports were growing like never before in the last three years. Momentum to continue is required as it will decrease the dependence of the country on one or two sectors only. In Budget FY23, the IT sector, including freelancers, has now come into a regular taxation framework, which required revision by considering it emerging export market where import duty on equipment can stay. The major hurdle is the tax regime and IT people are now establishing companies abroad to avoid harsh tax measures taken in Budget FY23.
Pakistan is an agricultural state and promoting agriculture will not only ensure food supply even during any other pandemic but it can secure FX while other countries may be affected by the Super Cycle in the international commodity market. Moreover, Agri Exports can bring good FX inflows from selling our products to China, Iran, UAE, Central Asian Republics etc. It is a notable fact that China imports USD 120 Billion in food items on an annual basis. For said reason subsidized diesel & fertilizers according to the size of Pass Book can facilitate cultivators.
Textiles produce 55 per cent of export. The major input material is cotton, which Pakistan produces but not in large quantities. Bangladesh has recently faced a BoP crisis for which it requested the IMF for some 4.5 Billion Dollars. CAD of Bangladesh is worsening and FX reserves depleting affecting Currency parity as well. This is because their imports are widening whereas exports are slowing down due to the pandemic and the impact of the premature global recession. Bangladesh is heavily dependent on Textiles like Pakistan but Pakistan has an edge over Bangladesh and that is an assurance of the supply chain related to said industry. From cotton to end product Pakistan is a one-stop solution for European or US importers of garments where distribution cost is also playing a major factor i.e. container/transportation cost has increased manifold since COVID19 hit the world in 2020. Orders are now coming towards Pakistan for the last two years when despite COVID19 Government did not close factories. Therefore the such flow of export orders needs its momentum to continue rather any blockage may stop it. Therefore cotton growers need immediate attention.
Rather than increasing tax rates or imposing a high-rated super tax on already tax-paying entities, a compulsory investment into Pakistan Stock Exchange or Venture Capital companies for Fertilizer and Energy related industries according to profit can be imposed. With such an obligation not only the company will be having such profit amount into retained earnings but these increased retained earnings when becoming part of equity can be used to get more financing from banks whereas the fertilizer or energy companies may be getting funds for their operations other than banks to avoid heavy interest rates. Cheaper funds may encourage profit earnings which eventually will be taxed at the normal tax rate regime and it will increase the tax basket.
Privatization is another source of immediate inflows of FX. Rather than panic selling of State Owned Enterprises (SOEs) Pakistan needs a Privatization Commission based on the format of Wealth Management or Venture Capital Companies where through Public Private partnerships from across the globe including expatriates may participate in such activity. This will not only raise FX but it will revive the sick unit in a way that the investor with controlling rights will eventually get better returns where Pakistan’s stake in assets will also remain. For this reason, Pakistan’s government must ensure a smooth and speedy IPO process, while education about private equity companies should be disseminated to the public at large. This will result in foreign exchange inflows from China, other countries, and expatriates. However, reinvesting returns into these special companies may be negotiated with investors so that the outflow of funds can be avoided.
For Fiscal and Budget Deficit immediate solution is to cut off all non-productive non-revenue expenditures other than social security. Politicians use PSDP/Development expenditure for gaining votes from the public rather than utilizing it for the real development of Pakistan. The immediate remedy is to reduce gaps between revenue and expenditure where PSDP and Provincial developmental budgets to rationalize. There are too many layers of government officers in departments which results in heavy administrative expenses therefore to reduce expenses not only to reduce layers to one-third but to abolish certain unnecessary ministries which can be controlled by one minister only. It will also improve the digitalization of administrative activities and control will be centric. One more step that will stop increasing layers is to delay CSS/PCS induction for some 5 years other than Judiciary where more judges are required for swift justice. More timely justice, and more productivity in human activities. Either promote performing government officials who better understand grass root level problems or use subject specialists from private sectors like corporate bankers, industry specialists etc because private sector people do much better multitasking in a certain amount of remuneration.
CNIC conditions for shopping for more than Rs 50,000 should be imposed immediately so that more people may come into the tax net. Rather than providing fuel subsidies indirectly, Fuel cards are to be launched, like CNIC-based Health cards, which may have a registered bike or Rikshaw or car less than 1000CC. Employers issue fuel cards to employees as a package of salary and those who are given fuel cards by companies will be removed from the list of subsidized fuel cards issued by the government. Proper database management will be key to success in this regard however a major subsidy amount will be reduced and the poor people of Pakistan will be relaxed from such high expense. Saving from PSDP, fuel subsidies, and reduced administrative expenses can be used to reduce fiscal deficit and electricity prices. Pakistan’s banking system needs to be addressed very technically. An immediate tilt towards Islamic banking may give better results for just the distribution of money in the shape of credits or loans. The Islamic banking system promotes the opportunity for business on a partnership and rental basis rather than giving loans on interest as conventional banks do. Pakistan needs a strong government with full power that may be able to implement policies and can better negotiate business conditions on the international front. The government can take action on the challenges discussed in this piece and take immediate measures to deal with the grim situation Pakistan is facing. We as a nation also need to change our priorities where we need to promote our brands and use digital ways of business activities so that more people may come into the tax net. A mutual effort from the government and the people will help make Pakistan a prosperous country.
The writer is a Corporate Finance Specialist and a Chartered Banker (UK). He tweets @syedaliimran75.
Dealing with Economic Emergency By Syed Ali Imran
Source: https://dailytimes.com.pk/978454/dealing-with-economic-emergency/