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Challenges of 2019

Pakistan’s economy in 2018 faced many challenges like trade, current account and budget deficits, high inflation, depletion in foreign currency reserves, depreciation of Pakistan rupee against US dollar and political situation of the country. The trade deficit is continuously increasing; the government has announced to form a new policy for the textile sector but couldn’t finalize that in 2018. Federal Bureau of Revenue trying to meet its tax collection targets but looks difficult to achieve its target in current fiscal year. Post-election, it was viewed that new government has a full support from the powerful institutions but somehow federal government is trying its best to create a political turmoil in the country. There are obviously better ways to do things and the federal government can achieve the same objectives effectively without creating any political unrest. Anyhow, this political unrest is impacting stock exchange very badly.Pakistan’s economy has faced various issues in 2018 and those needs to be address in 2019, which one way or another hampered the progress of the economy. Few of these are as follows:Country’s Gross Domestic Product (GDP) was at a decade high level of 5.3 percent in fiscal 2017 and it achieved a 13–year high growth of around 5.8 percent in the fiscal year 2018. In last federal budget, the government set a GDP growth target of 6 percent for the fiscal year 2019. But now it is estimated that it would be less than 3 percent in the fiscal year 2019. Economic fundamentals have deteriorated since last year and it seems that it would further deteriorate in the coming months if things would continue like this.

Pakistani rupee remained between 104 and 105 per dollar since 2015 till early 2018, but it has devalued almost 40 percent in the last 8 months. Due to the fall in Rupee, the economy has suffered. Devaluation of Rupee has a direct impact on almost all the consumer products, country’s foreign currency debt and its ability to pay its import bill. The only good thing happened in recent days was a decrease in the prices of oil in the international market, which has offset the impact of the devaluation of the Rupee to some extent. A UK-based advisory service, Economist Intelligent Unit (EIU), in its latest report stated that Pakistan is facing an impending balance of payments crisis, with foreign reserves not even enough to cover two months worth of imports. Pakistan’s foreign currency reserves have dropped to a critical level of less than two months import cover. Country’s foreign currency reserves have felled below the US dollar 8 billion mark, raising concern about Pakistan’s ability to meet its financing requirements. Pakistan has recently received a foreign currency support of two billion dollars from Saudi Arabia, which is not sufficient enough to cover the gap. Overall, liquid foreign currency reserves held by the country, including net reserves held by banks other than the SBP, stood at US dollar 14.017.8 billion. Net reserves held by banks amounted to US dollar 6,560 billion. More than a month ago, China agreed to provide a loan of over US dollar 2 billion to Pakistan, which it has not yet received. In short, the falling foreign currency reserves are putting pressure on the exchange rate.

It is now obvious that Pakistan is going to International Monetary Fund (IMF) for a bailout program in January 2019. IMF has asked Pakistan to ensure primary surplus on budget deficit to move ahead with the program, leaving it with the hard choice of either slashing down its defense or development expenditure. It is said that the budget deficit has to be curtailed within a range of 4 to 5 percent of GDP during the program period. Pakistan and the IMF do not agree on revenue projections of the FBR because the Fund mission calculated the FBR target on the basis of the devaluation of rupee ranging beyond Rs150 against US dollar but Islamabad refuses to accept this kind of adjustments in one go on an immediate basis. The IMF wants to jack up the FBR collections to more than Rs. 4,550 billion for the current fiscal but the FBR authorities want to keep it close to Rs. 4,455 billion. The government has plans to get additional revenues by jacking up the tax rates on POL products.

 

State Bank of Pakistan (SBP) has recently increased 150 basis-point in its key policy rate to contain rising inflation. The short-term lending rate has now risen to 10 percent from 8.5 percent and will remain effective for the next two months. While announcing the rate, the SBP said inflation in 2018-19 might remain between 6.5 percent and 7.5 percent against the target of 6 percent. There is no doubt that an increase in lending rates means a higher cost of finance for many sectors of the industry. These events clearly indicate that Pakistan is serious in seeking a fresh IMF loan. It’s a fact that the government is borrowing from the central bank to retire previous debts of commercial banks and to meet its current expenses. Bankers view this increase in interest rate as slowing down in the growth and private sector borrowings. The latest monetary tightening means an increase in banks’ lending rates, which means a higher cost of finance. It is being said that the higher interest rates will hurt even those five sectors of large-scale manufacturing (LSM) that have so far shown a rising trend in production. These are electronics, leather products, paper and board, engineering products and rubber products. Independent analysts’ view that serious impact of the interest rate increase will be on small and medium enterprises (SMEs). It is expected that with low economic growth, a weaker rupee, and high-interest rates, SMEs’ loan defaults will grow. And that, in turn, will discourage banks from lending to the SME sector, particularly if the government restarts borrowing from the banks heavily.

Fitch, a global credit rating agency has recently downgraded Pakistan’s long-term foreign currency issuer default rating by one notch, from B to B- (B minus) on heighted external financing risk, and increased foreign debt payments. This rating downgrade has pushed Pakistan to the lower end of the highly speculative grade. According to Fitch, a B rating indicates that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment. Earlier in June 2018, rating agency Moody’s changed Pakistan’s outlook from Stable to Negative while affirming its B3 rating, which corresponds to a B- by Standard & Poor’s and Fitch. Therefore, rating downgrade indicates a greater credit risk; therefore, it is likely to push up the return required from Pakistan when it goes to the international markets to raise debt.

Rising global interest rates and tighter liquidity situation will pose challenges for Pakistan, given the high gross external financing requirements.Pakistan’s economic situation is expected to remain fragile for at least two years as a combination of low economic growth and high inflation due to stabilization policies will undermine efforts to lift people out of poverty and create jobs, says a new World Bank report. The Bank underlined that Pakistan’s macroeconomic situation would remain fragile as consumption-led growth is expected to slow down due to fiscal and possible monetary tightening.The World Bank report showed that this year all the three main sectors of the economy will face a slowdown, most notably the services sector that contribute nearly 60 percent in total national output.The federal government has to address all of the above issues on a priority basis in case it wants to have an economically better Pakistan in 2019. Therefore, short-term measures for fiscal consolidation and export growth need to be complemented with the implementation of medium-term structural reforms to uplift the economy.

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