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Pakistan’s economy likely to foster after IMF, Moody’s reports

Last month, the International Monetary Fund (IMF) raised its concerns over Pakistan’s widening fiscal deficit outlook and warned that the challenges on fiscal, external and energy fronts could affect the hard-won stability gains in the period ahead and called for strong efforts with respect to fiscal consolidation and the implementation of key structural reforms, and vigilance in managing the country’s external position. The international lender has predicted that the current account deficit could reach 2.9 percent of GDP during the current fiscal year owing to a higher trade balance — in part reflecting increased imports of energy and capital goods — and stagnant remittances.

However, there has been the two good reports on Pakistan economic front as a very recently IMF report on regional outlook noted foreign-financed infrastructure spending as a key driver in propelling growth in oil importing countries, including Pakistan where implementation of the China-Pakistan Economic Corridor will boost investment. Pakistan is clubbed with MENAP region that includes Middle East, North Africa, Afghanistan and Pakistan in IMF Regional Outlook report released on Monday (April 8, 2017). The report noted that among the regional countries, growth will be particularly robust in Djibouti and in Pakistan, mainly owing to the investment under CPEC.

And also last week, credit rating agency Moody’s kept Pakistan’s B3 rating with a stable outlook in a recent analysis, saying strong growth performance, fiscal deficit reduction, and improved inflation dynamics underpin the rating. Riding the high-tide of China-Pakistan Economic Corridor (CPEC), a project that has received acclaim from international rating agencies in the past, Pakistan has achieved a B3 rating with a stable outlook from Moody’s yet again.

In the budget for the current fiscal year, the government set the fiscal deficit target of 3.8 percent of Gross Domestic Product (GDP) while in the last meeting with the IMF in Dubai, country’s Finance Minister Ishaq Dar, however, projected the fiscal deficit target to reach 4.1 percent of the GDP during the current fiscal year ending on June 30, 2017, while the reasons given over the widening fiscal deficit limit include a Rs100 billion shortfall in revenue collection due to low oil prices and a support package for exports and agriculture.

Mr. Dar downplayed the wide gap between increasing imports and declining exports and contended that the 42 percent growth in imports was from capital goods – plants and machinery – that would support economic growth and job creation. On the other hand, the export quantities, he claimed, were increasing even through prices were on the decline globally.


The country’s fiscal deficit increased to around 2.4 percent of GDP during first half (July-Dec) period of the current fiscal year 2016-17 mainly because of yawning gap between total revenues and expenditures. The deficit went up in first six months mainly because of tax shortfall faced by the FBR during the first half of the ongoing fiscal year. The FBR had collected Rs1,470 billion during first six month of financial year 2016-17 against desired target of Rs1,594 billion, registering a shortfall to the tune of Rs124 billion.

Since the very outset of the current fiscal year, it has been a difficult task for the FBR to meet tax collection target. The officials continued to blame the decline in POL prices that played havoc with the tax collection as it was causing revenue loss to the tune of Rs20 to 22 billion on monthly basis. Another reason frequently cited by the officials was the reduced rate of GST for fertilizer that caused loss to the tune of Rs3 to 4 billion on monthly basis. In the given situation it was almost impossible for the FBR to achieve its desired annual target of Rs3,604 billion.

It is, however, worth mentioning that FBR achieved 60 percent growth in tax revenues in the last three years, perhaps, this was the reason that the international credit rating agency Moody’s has given Pakistan B3 rating with a stable outlook because of strong economic growth and reduction in fiscal deficit. The stable outlook represents balanced upside and downside risks to the sovereign credit profile. “Strong growth performance, fiscal deficit reduction and improved inflation dynamics underpin the Government of Pakistan’s B3 rating with a stable outlook,” says Moody’s Investors Service.

Moody’s noted that prospects for growth have improved following Pakistan’s successful completion of its three-year Extended Fund Facility (EFF) program with the International Monetary Fund (IMF) in September 2016 and the launch of the China-Pakistan Economic Corridor (CPEC) project in 2015. It also noted that the implementation of the CPEC project has the potential to transform the Pakistani economy by relieving infrastructure bottlenecks, and stimulating both foreign and domestic investment.

“Credit challenges include a relatively high general government debt burden, weak physical and social infrastructure, a fragile external payments position, and high political risk,” Moody’s said in its report.


The debt-to-GDP ratio actually indicates a country’s ability to pay back its debt. A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt. The country’s poor debt-to-GDP ratio amply debunks that country’s economic managers have not been successful in initiating timely fiscal and monetary reforms to raise revenues.

Last year, the IMF painted a bleak picture of the country’s economy when it estimated that the country’s external debt obligations would surge to $70.2 billion by end of the last fiscal year. The IMF had also predicted that Pakistan’s debt-to-GDP ratio was all set to touch the 65 percent mark.

The country has virtually come in a debt trap, which is bad omen for the economy. The country witnessed a significant increase in its overall debt in the past three years. The overall debt, estimated at Rs9.5 trillion in 2013 rose to Rs12.7 trillion in 2016. Similarly, the external debt at $73 billion in 2016 increased substantially from $61 billion in 2013.

There is nothing wrong with debt in itself. Private businesses borrow happily, as long as the rate of return on the debt-financed investment is higher than the cost of borrowing. The surging debt is a burden for Pakistan because its Gross Domestic Product (GDP) growth is not faster than the rate at which debt is serviced. The cost of external debt is incurred in foreign currency, hence a surge in the debt burden depletes foreign reserves, triggers devaluation and increases the cost of debt. The external debt service-to-exports ratio at 20 percent for 2016 was better than the 22.5 percent in 2015, according to State Bank of Pakistan.

The country’s exports are stagnant depicting a decline. The exports were estimated at $27.4 billion in 2016, compared to $31.5 billion in 2013. These estimates show the country’s weakness to service future external debt liabilities.

What is the long-term solution to the country’s debt problem is to bring improvement in the export performance. In short term, the government avoid to borrow from the international lenders and take impressive measures to reduce the ever widening fiscal deficit.

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