GROWING DEBTS

DEBT SERVICING WILL BE DIFFICULT WITH LOW GROWTH OUTLOOK

SHABBIR H. KAZMI
Aug 17 - 23, 2009

The subprime loan fiasco of the United States has plunged the entire world into recession. The US injected billions of dollars to avoid the bankruptcy of its giant business conglomerates. The European and Asian economies are still struggling. Even the oil rich Gulf countries could not remain immune. Worst hits are the countries, which are energy deficient and also dependent on imported food of which Pakistan is also a member.

One of the factors affecting Pakistan's economy was the general election. While the previous regime, which came up with many good policies fell prey to the election campaign, the new incumbent continues to face odds due to the rift among its political allies. In fact, most of its energy and time was spent on mending the fence rather than coming up with policies to face the onslaught of recession.

The job became even more difficult firstly because of lack of expertise in formulating and implementing prudent policies and secondly Pakistan becoming 'battling ground for the militants'. Not only that enormous amount of funds has to be spent on weeding out these militants, but also terrorist attacks caused the worst dent to the economy.

As the internal sources of revenue fall short of the need, Pakistan has to virtually knock every door for the financial assistance to keep its economy afloat. Manufacturing sector suffered the most on account of higher interest rates and extended load shedding of electricity and gas, mainly due to rising circular debt. Inadequate revenue prompted the 'confused and preoccupied' economic managers to squeeze as much money as possible from the POL products, despite the warnings that higher cost of energy products was the worst cause of inflation in the country.

The present regime has resorted to extensive borrowing, both internal and external to overcome problems resulting from global economic slowdown. Incidentally, donors and multilateral financial institutions have been more than generous but experts are becoming a little uncomfortable. It is estimated that at present Pakistan's external debt exceeds US$52 billion and internal debt is close to Rs4 trillion. As a result, external debt servicing is likely to be around US$7 billion in the near future.

The points of concern are 1) debt servicing will soon become unsustainable and initiate the vicious cycle of borrowing more for discharging the liabilities and 2) economic managers have not prepared policies which can accelerate GDP growth rate, produce exportable surplus, contain erosion of Pakistan's competitive advantage and above all restore investors' confidence.

It is true that global recession is affecting Pakistan but the factors ailing its economy are internal. These include precarious law & order situation and unsustainable cost of doing business. However, the real cause of concern is the inability of the economic managers to contain non-development expenses and come up with prudent and proactive policies capable of invigorating the process of recovery.

Federal budget for current fiscal year met a number of mishaps, the worst being withdrawal of Carbon Tax aimed at mobilizing Rs134 billion. Having failed in convincing the house as well as the apex court, in a rather unusual manner Petroleum Development Levy was imposed through an ordinance issued by the President.

Then came deferring of monetary policy statement announcement till mid August. It was said that the deferment was mainly due to delay in disbursement of tranche and ongoing discussions with the IMF. However, the overwhelming perception was that delay in release of the tranche was mainly due to Pakistan's request for additional assistance.

Announcement of Trade Policy also raised more questions than any sustainable strategy. Firstly, the policy was announced after a considerable delay. Secondly, the target was lowered as compared to previous year but an impression was created that the policy aimed at achieving 6% growth in exports.

It was also stated that efforts would be made to achieve greater access in the existing markets and exploring new markets. One fails to understand the logic because the most important factor responsible for declining exports is eroding competitiveness of the local manufacturers not the limited access to the global markets. Unless competitive advantage is restored Pakistani exporters will not be able to counter the onslaught of their traditional competitors.

FACTORS RESPONSIBLE FOR HUGE EXTERNAL BORROWING

First of all, it is necessary to explore reasons for extensive borrowing by the present regime. The overwhelming perception is that they have found an easy solution of borrowing as much as possible on one or the other pretext rather than initiating policies which can accelerate the process of economic revival. It seems that they have realized that winning election for the second term is just not possible therefore, they should not initiate policies which could deliver results but with a lag. They also understand hat whatever they borrow now would become payable during the tenure of the subsequent governments and therefore would be their headache. It seems that the strategy of present economic managers is 'enjoy the term and pass on the problems to the next incumbents'.

When they took over control the worst problem was widening current account deficit. It was mainly due to skyrocketing prices of food items and crude oil. Since the phenomenon was universal and affecting all the countries irrespective of developed, developing and least developed, the demand for external assistance was accepted. This was followed by initiation of global financial crisis, which prompted them to enhance the request assistance.

Rationalizing widening trade deficit also became easy and holding down privatization process carried legitimacy. Global meltdown was also termed the reason for slow pace of inflow of foreign direct and portfolio investment. While millions of dollars have been spent on the foreign visits, benefits are yet to come.

The team assigned the responsibility to 'beg as much as possible' has been successful but there is no team to prepare economic revival plan. To save the skin 'previous government is being held responsible for all the ills'. The regime has been in power for more than 18 months but has not come up with any tangible solutions. Load shedding of electricity and gas has created new records and it is evident that load shedding is not because of supply constraints but mismanagement.

Failure in boosting exports and containing imports continue to increase trade deficit. It has been said repeatedly that to contain trade deficit import of luxury and unnecessary products has to be stopped or contained. One of the reasons for reduction in trade deficit is substantial fall in the import of plant and machinery and industrial raw materials. It is also feared that any hike in the prices of commodities and crude oil can once again disrupt the equation.

DEPRECIATING RUPEE

Lately rupee has depreciated by around 35% against US dollar and also against other leading currencies. On the one hand, it has increased cost of every imported item from POL products to CKD kits of automobile and from cost of electricity to medicines. On the other hand, it has also increased external debt servicing. In other words depreciated rupee has increased prices and fueled inflation. Rising prices have also decreased purchasing power of people and plunged already low savings. In fact, people have been forced to borrow by pledging their future income.

As against this, there has been no significant increase in Pakistan's exports. It has been said repeatedly that limited market access is not the issue but eroding competitiveness is the real problem. Rising cost of doing business is the main culprit. Added to this are intensive and extensive load shedding of electricity and gas. In case of the outage either the workforce has to be kept busy by operating on stand-by power generation facility which increases cost or let them sit idle but pay their wages.

PLUS POINTS

Declining imports of plant and machinery is a serious cause of concern but reduction in import of non-essential goods is a positive sign. This phenomenon may yield some relief for the time being but import of plant and machinery and raw materials have to be boosted to accelerate GDP growth rate. The negative growth of manufacturing sector has to be reversed for enhancing exportable surplus. To achieve this cost of doing business has to be reduced substantially and at the earliest.

One of the factors providing some credence is growing remittances. However, remittances alone cannot help in containing current account deficit. It has to be supported by policies capable of attracting investment, both local and foreign. In this regards all the political parties either ruling or in the opposition have to develop consensus on national issues, come up with policies, and then implement these in letter and spirit.

WAY FORWARD

To understand Pakistan's economic woes one needs not be wizard. The country suffers from twin deficits budget deficit and trade deficit. To overcome the first problem the economic managers have to strike a balance between revenue and expenditure. This demands two tier policies, one for enhancing revenue and other for containing extravaganzas. For additional revenue the government should abstain from taxing the already tax payers and plugging the leakages. All those who have been evading tax and/or enjoying exemptions must be taxed, initially at a lower rate and subsequently be brought at par with the existing taxpayers.

The prevailing situation also demands austerity by the elected representatives as well as the bureaucracy. The revenue pool of Islamic Republic of Pakistan is equivalent to 'Baitul Mall' and each rupee has to be spent prudently. The austerity drive has to start from the top.

To contain trade deficit the best efforts should be made for enhancing exports and avoiding import of luxury goods. Ideally, quantitative restrictions should be imposed on import of items meant for elites only and letters of credit should only be established by demanding 100% cash margin. It must be kept in mind that WTO Article-6 allows the countries suffering from adverse balance of payment to impose quantitative restrictions for a defined period and if the situation does not improve the restriction can be extended for another predefined period. However, the WTO has to be informed about these restrictions.

The government has announced trade as well as textile policies but experts term these incapable of boosting GDP growth and exports. The proposed measures will take couple of years to yield result but all the stakeholders will have to work on war footing to avert the prevailing crisis.

A war like situation in the northern areas of Pakistan and its spillover in the urban areas has hurt country's economy very badly. Operation by security forces is costing millions of rupees and has become unbearable burden. The precarious law & order situation has virtually halted new investment. The global recession and adverse law & order situation has become the worst hurdle in the inflow of foreign direct and portfolio investment and privatization program.

It seems the nation is waiting for the Messiah. Most of the time of economic managers is being spent on luring the donors. The elected representatives seem to be suffering from 'Musharraf Phobia'. The ruling party must realize that it is not sitting on the opposition benches. It has the mandate to rule for five years. They must learn from the fact that the previous government could not get the fresh mandate because of its bad policies. To win public support there is only one option i.e. 'improve economic condition'. Slogans cannot fill the stomach.