Pursuing foreign investment

After attending the meeting of World Economic Forum (WEF) at DAVOS, Prime Minister Shahid Khaqan Abbasi said that his interaction with the executives of world’s biggest companies will help generate billions of dollars potential in Pakistan. He expressed the desire that Pakistan wants strong relations with the United States. The Prime Minister also showcased the much trumpeted game changer, the CPEC in panel discussion at the sideline of WEF although the Nitti gritty of  Long Term Plan (LTP) of this corridor approved in the 7th Joint Cooperation Committee meeting held in November 2017 are still shrouded in mystery.

In the backdrop of WEF meeting one of the top three credit rating agencies FITCH has released a report about the economic outlook of Pakistan which reflect a situation of long term default in both local and foreign currencies because of the continued reckless borrowing, massive budget and current account deficits. The credit rating of Pakistan has been described to be heading towards negative and has been currently affirmed category ‘B for both local and foreign currencies. The FITCH report elucidates that the surge in the foreign currency reserves was mainly due the International Monetary Fund (IMF) loan of Extended Fund Facility and not of the external sector performance as the exports were fast declining and imports were rising. That is why foreign currency reserves went on decline path when the IMF Program ended in September 2016. The government did not take corrective measures to boost exports and took an easy recourse of floating Sukuk Bonds, and Euro Bonds of $ 2.5 billion besides obtaining high interest bearing short term commercial loan of $ 1.5 billion to shore up the fast depleting foreign currency reserves. The half hearted measures of tax rebates on exports and high regulatory duty on about 400 hundred import items have proved insufficient to arrest the ongoing decline in the foreign exchange reserves. FITCH forecasts that over all reserves including gold would fall to $ 16 billion in June 2018 which would hardly cover 3 months current account payments. The current account deficit reflects Capital goods imports for CPEC, abnormally high price of LNG import from Qatar, sluggish exports and loose macroeconomic policies. FITCH report suggests that only strong economic growth can offset the fall out of bad governance, alarming debt to GDP ratio and fragile external position.

US president Donald Trump in his speech at WEF hinted at the likely currency war with China in which Pakistan’s economy will receive a big collateral damage. The country will face a new challenge of further losing whatever left competitiveness of its products in the global market. The shady LNG import deal and high power and gas tariffs have already eroded the competitiveness of number of our primary commodities and finished goods in the global market which were the most sought after items of purchase till 2007. The depreciation of US dollar would make British Pound Sterling and EU Euro more expensive, affecting Pakistan exports to EU market. In order to improve its balance of payment with China, the United States has implicitly decided to allow its currency to weaken. The move is aimed to make its high quality products cheaper and competitive in the global market, a place hitherto dominated by Chinese merchandise. Since Pakistani exporters price their exportable goods in dollar terms, they would lose the completive edge in Briton and European Union market. Not only that, the depreciation of Rupee versus other currencies would make the international competitiveness more expensive that will further increase Pakistan’s import bill. The LNG import would also get expensive as the price of crude oil goes up. This will have a multiplier effect across the board on all the primary commodities and finished goods , further squeezing the quantum of exports and imports for industrial raw material which will slow down the production activities of large scale manufacturing. It is time that agreement of LNG import with Qatar is renegotiated to bring down its price and at par with India and convince Chinese companies to sell the thermal power of their under completion power plants at comparatively low tariff. Hopefully, they will take seriously the imminent US currency war with China.