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Prioritizing in times of crisis

The current government has completed hundred days milestone with mixed performance. Most of the economic indicators are not very encouraging and no significant improvement in any area in the macro-economy was witnessed despite sincere efforts by the new government. Pakistan’s economy is passing through a very critical situation. Foreign debt has nearly reached USD 95 billion; debt-servicing costs are crippling; foreign-exchange reserves are at almost the lowest level in the nation’s recent history; exports have dropped and foreign remittances have also suffered. Devaluation of the Pakistani currency has increased inflation domestically. The poor system of tax collection is a major cause of budgetary deficiency in the form of income and expenditures. It wouldn’t be wrong to say that the gap between poor and rich is growing rapidly.

The fact that Pakistan’s economy has been in a crisis is not a new revelation. The crisis has been manifested from around 2007 when the economy had begun to slow down its growth from a record high growth of 2005-06. By the time when the last government came to power in May 2013, all the available macroeconomic indicators had shown signs of distress. A lot of economic activity mainly because of CPEC was witnessed in the last five years, which effectively turn around the economy to some extent. Then came the political crisis in Pakistan and we have reached the point where we are today. Following are few of the areas which are causing the current economic crisis and at least these areas need to be prioritized for overcoming the current situation;

A declining growth rate:

Whatever the number we quote or use, the results have been contrary to the expectations of the authorities. It was projected that the economy would achieve higher growth of over 6 percent in 2018-19 as compared to 5.8 percent 2017-18. Now it is clear that it is not going to happen, some say previous government deliberately projected higher GDP growth rate thus created difficulties for the new government as they knew targets would never be achieved. The first quarter results now show that the country’s real GDP in 2018 is less than the earlier prediction. SBP has projected real GDP growth for FY19 at slightly above four percent, which is a further diversion from its previous 4.7 percent projection in the annual state of the economy report last month and is much below the annual target of 6.2 percent.

Rupee under pressure for depreciation:

The exchange rate was under pressure for a massive depreciation because the previous government kept the value of the rupee artificially at a constant level. When the reserve levels which were built by borrowing and not by the earning; had fallen to a critically low level, the country could no longer continue to feed the market’s demand for dollars. Exports, a means of earning reserves, had declined both in dollar terms and as a share of the total GDP. November 30 devaluation of Rupee is the third devaluation since the departure of the last political government. The previous political government left the Dollar at 110 rupees. Caretaker government devalued it just before the elections and dollar jumped to 128 rupees. On October 9, dollar gained 11 rupees and settled at Rs. 134. Now, Rupee shed another 10 rupees against US dollar in just one day on 30 November 2018. It opened at a high of 142 rupees in the morning, went as high as 144 and finally settled at 138. It is believed that the devaluation was linked with the government’s talks with IMF to secure a bailout package. Analysts also attribute rupee’s persistent weakness to the balance of payment crisis and dwindling foreign exchange reserves. With the recent devaluation of rupee, the external debt has swelled by a staggering Rs. 760 billion. The devaluation will further increase the inflation and interest rates thus affecting the investment in the country. The rupee has lost about a third of its value since the start of the year as Pakistan struggles with chronic inflation as it burns through its dwindling foreign currency reserves, which are down around 40 percent this year.


Shortage of foreign currency reserves in the market:

Pakistan’s foreign currency reserves dropped in late September to USD 8.4 billion, barely enough to make its debt payments. Analysts say Pakistan needs as much as USD 12 billion in loans to cover the trade deficit and pay off the liabilities. Pakistan received one billion dollars from Saudi Arabia in the last week of November, which took the SBP’s reserves to USD 8.3 billion. The total liquid foreign reserves held by the country stood at USD 14.5 billion on by the week ended on November 23. The reserves held by the commercial banks were at USD 6.5 billion. As per Pakistan Bureau of Statistics latest announcement, the trade deficit is controlled to some to extent due to unexpected increase in exports as against the imports. Pakistan’s trade deficit was recorded at USD 11.8 billion during the July-October period of the ongoing financial year as against USD 12 billion of the corresponding period of the previous year, showing a decline of 1.97 percent. In FY18, Pakistan witnessed a record trade deficit of USD 37.6 billion, which was 15.7 percent higher from the last year. However, FX reserves got some support by the remittances sent to the country by the Pakistanis working abroad. The country’s freely available foreign exchange reserves, the money immediately available for meeting future foreign debt repayments and making payments for imports and other services, has amounted to USD 6 billion. The government’s situation is in a precarious situation with its revenue falling relative to the country’s GDP, generating stubbornly high overall budget deficits and making it necessary to borrow more to repay maturing debt.

Rising foreign debt:

It is said that Pakistan’s system is ill-equipped to make changes which could avoid future excessive debt. Pakistan’s external debt and liabilities have soared to a record USD 92 billion, the SBP has reported. There are apprehensions that the country may not survive financially for long without the IMF support. Pakistan’s government debt rose from 67.3 percent of the GDP in 2Qof 2017 to 69.9 percent during the 2Q of 2018. Federal Minister for Finance Asad Umar has said that enhancing the country exports was the only way to overcome the external debt or we have to seek more loans from IMF to run the affairs of the country.

Immediate action needed:

Now, hundred days of the new government have elapsed since it has taken control of the management of the country’s economy. No significant improvement in any other area in the macro economy is witnessed. The government was expected to consolidate the budget by expanding the revenue base, curtailing the expenditure programs, narrowing the budget deficit and slowing the growth of public debt. However, the achievement has been only with respect to a marginal improvement in the revenue base which is mainly due to foreign remittances by overseas Pakistanis. Since new loans have to be raised in order to pay interest and repay the maturing loans, and the debt too continued to increase unabated. As a result, the debt to GDP ratio which had been declining marginally in the recent few years has taken a reverse turn in 2018.

The Government of Pakistan has expressed its desires to enact deep structural reforms that might break the cycle of Pakistan needing financial support from IMF. Pakistan has gone to the IMF repeatedly since the late 1980s. The last time was in 2013 when Islamabad got a USD 6.6 billion loans to tackle a similar crisis. Pakistan, therefore, needs to take immediate measures to address the current declining trend and place the economy on a long-term economic growth path. There is a need to introduce economy-wide reform programs. All economic reforms are painful since they require at least some section of the population to make sacrifices. In the current political environment, these are difficult and challenging tasks. But, it is only possible to accomplish if the political leadership has the will, dedication and commitment to take the country through the needed reform program. Moreover, above all, what is needed is the capacity and ability to manage the reform program.

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