Dec 26, 2011 - Jan 1, 20

Hugely indebted Pakistan is nearing a default on its domestic as well as external debt, while the country's finance minister Dr. Abdul Hafeez Shaikh is repeating the mantra of positive economic indicators.

Dr. Shaikh recently told reporters in Islamabad that economic indicators were showing positive results due to prudent economic policies initiated by the government. He reportedly said the government wanted to improve the performance of state owned enterprises like Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM) and Pakistan Railways through introducing efficient management in order to make them profitable entities.

The unofficial picture of the country's economy is very bleak, as the hugely indebted country is nearing a default on its domestic as well as external debts. Moody's sovereign ratings on Pakistan implies a significant default probability over the medium-term.

The credit rating agency has projected the credit and business conditions in the country to remain fragile due to the government's weak fiscal position and the poor investment climate.

Analysts warn that the country could face balance of payment problem due to likely fall in export proceeds in the months ahead and repayment of International Monetary Fund (IMF) loan due early next year.

Pakistan's economy is likely to grow by 3-4 percent, against the original growth target of 4.2 percent set by the government for the current fiscal year ending June 2012, according to the country's central bank.

The central bank has projected a fiscal deficit of 5.5 to 6.5 per cent of gross domestic product (GDP), against a government target of four percent for the current fiscal year.

Stagnant foreign inflows have left the government with the only option of borrowing from the banking system to support fiscal operations.

In the first week of this month, the federal government borrowed Rs38 billion from commercial banks to finance the fiscal deficit.

Islamabad decided to rebuff IMF cash and ended the recent $11.3 billion loan program on September 30 with the last two tranches of over $3 billion undisbursed. The country's fragile economy had been kept afloat with IMF loan program since 2008.

The country's external debt has crossed $61 billion mark, while the government borrowing from the commercial banks stood at Rs653.74 billion from July to November 25, which stood at Rs54.627 billion in the previous year.

The foreign debt rose to $61.845 billion in June 2011, from $57.363 billion a year earlier. The country paid $8.854 billion in debt servicing including $7.786 billion as principals and $1.068 billion as interest during 2011, according to the central bank.

The erosion of rupee is likely to have repercussions for the government's total debt, which would automatically increase because the public debt is presented in the rupee terms.

In the first five months of the current fiscal year ending June 2012, the government continued to borrow from commercial banks particularly through term finance certificates (TFCs), Pakistan investment bonds (PIBs) and treasury bills (T-bills).

The country's current account deficit ballooned to $2.104 billion in five months of the current fiscal year (July-November) because of the swelling trade deficit and shrinking foreign exchange reserves.

The experts fear that the country would be facing serious balance of payment situation in months to come because of its projected four billion dollars foreign inflows for the ongoing fiscal year 2011-12 are at risk.

The risks would have negative impact on country's foreign exchange reserves, which might shrink from current $16 billion to below $10 billion by June 2012.

The country's gap between external payments and receipts in November swelled to $478 million, up 66.5 percent from October, according to the central bank.

It seems difficult for the country to sustain its balance of payment without assistance of international donors and lenders. Rising current account deficit forced the country in 2008 to turn to the IMF for a $11.3 billion loan under Stand by Arrangement (SBA) to avoid default on international payment.

The experts believe that rise in current account deficit would directly hurt the country's foreign exchange reserves.

The central bank fears that foreign currency reserves could fall to as low as $12 billion by June as current account deficit balloons to $2.1 billion over the next five months.

The country's cumulative deficit of goods, service and income increased by 28 percent or $1.95 billion to $8.88 billion in first five months of current fiscal year against a deficit of $6.92 billion in the same period of last fiscal year, according to the central bank.

The country's exports are likely to face a dip owing to the recession in European Union and other regions. Presently, the country's widening trade deficit - with exports at around $2 billion and imports at around $3.5 billion per month - is making it difficult for the economic managers to manage the situation.

Local textile makers complain that overall the industry has experienced gas supply suspension for 120 days during March-October.

Surge in imports and the fall in export proceeds is contrary to the healthy projection of the external account estimated in a joint report by the finance ministry and the state bank of Pakistan.

A sliding rupee against dollar has not only enhanced the country's debt burden but also swelled the deficit of current account.

The rupee has reached Rs90 against the greenback in the open and inter-bank market. Some analysts predict that the pressure on rupee might take it to Rs95 a US dollar by June 2012.

Some currency dealers argue that the tensions between Pakistan and the US - following the cross-border air strikes by Nato on Pakistani posts near Afghanistan border on November 26 that killed 24 Pakistani soldiers - have affected the rupee because Washington has influence with international lending agencies. Pakistan-US relations have an impact on relationship between the rupee and the greenback, as demand for the US dollar increases in the local currency market when their bilateral relations reach the lowest ebb.

Pakistan's central bank is allowing the local currency to weaken against the greenback in a move to boost exports and attract more workers remittances from abroad, according to some analysts. The central bank, which seems to stay committed with its foreign exchange reserves, is reluctant to intervene in the market operations. Critics however say that gains on export and remittances front will be short term, while in the long term the rupee depreciation will make imports costlier, which will fuel inflation, because the country's export-oriented industries heavily depend on imported raw materials.