Macroeconomic risks

Ahead of the World Bank and IMF meetings this week, the Bank has released its report titled ‘The South Asia Economic Focus Fall 2017’, which paints a very gloomy picture of Pakistan’s economy and belies the present government’s tall claims of fiscal stability and economic growth. The report says that macroeconomic risks have increased in Pakistan during the current financial year. The external balance is particularly vulnerable given the persistent current account deficits that badly affect the foreign exchange reserves.

Pakistan weaker macroeconomic discipline had led to the vulnerabilities in the balance of payment after the expiry of IMF loan program. The indicators of the economy have greatly deteriorated due to the outflow of foreign exchange from the country. One year ago Pakistan was apparently in comfortable position. The Forex were large enough to cover the current account deficit. These reserves were largely devoured by the servicing of the external debt and total volume of portfolio investment. The report urges to address the increased vulnerability on priority. The artificial macroeconomic stability during the first three years of the present government was mainly due to the capital inflows of the IMF loan program, rising home remittances, 1.5 billion dollars from Saudi Arabia and oil price crash in the international market. The improvement in the external balance hinges upon a revival in exports, discouraging the imports of luxury goods and stable remittance position. The meaningful initiatives have not been taken for the revival of exports and substantial decrease in the import of unnecessary goods. In the absence of these factors the persistent current account deficits will put further pressure on the already dwindling reserves.

The fiscal position is bound to deteriorate during the election cycle which would affect debt trend and maintain it at the current high level. The hostile posturing of the government ministers and leaders of the PML (N) against the state institutions will also take a heavy toll on the economy. Renowned economists like Shahid Hassan Sidiqi, Ashfaq Ahmad Khan, Hafeez Pasha, Akmal Hussain and World Bank technocrat Michael Aziz were critical of the mismanagement of the economy by the finance minister Ishaq Dar and his team of economic managers. But the finance minister always boasted that the economy is heading towards the 18th position in the global economy and dubbed his critics pseudo-intellectuals. The point of view of these critics was that the ill conceived and implemented fiscal policy of the present finance minster will land the country into a dead trap. The external debts have now risen to 90 billion dollars and will touch the highest mark of 100 billion dollars before the closing of current fiscal year. The debt servicing problem will further aggravate when the loans acquired from AXM Bank of China at a very high interest rate of 8% will be returned from 2018 and onwards. Pakistan has to pay 3.5 billion dollars on account of debts servicing to Chinese banks for CPEC related projects starting from the next year. The amount of debt servicing will jump to 5 billion dollars from 2020 and onwards.

The exports have declined by 5 billion dollars and it will follow the same trend in case 40 billion dollars IMF package is sought for as a budgetary support for the next year federal budget. The IMF conditionality for so called power sector reforms will dissolve in 10 years whatever, minimal comparative advantage the country has in the export of textile, cement, cotton and other agriculture products. The contours of economic zones along the CPEC road have not been made clear. Hence, the apprehension of the entrepreneurs of golden industrial triangle comprising the industries of Gujrat, Gujrawala and Sialkot seems to be valid. The chambers of commerce and industries of these cities are frequently demanding from the federal government to provide protection to the export of electrical, surgical and sport goods against the unbridled inflow of cheaper Chinese goods. Hopefully, the government will rise from the deliberate slumber and focus its attention on corrective fiscal measures.