Reviving the economy

In the current situation there is no end to our economy woes. Among other things, the current account deficit is feared to go beyond $17 billion by June next year and $23 billion in 2019-20. According to a report, Pakistan has been placed among four out of 10 countries that would default soon on repayment of external debt. Venezuela has already defaulted, and the other three countries in line are Pakistan, Egypt and Ecuador. Renowned economist Hafeez Pasha has warned that time is running out and it is important to act before nothing is left to fall back upon. He estimates that our foreign exchange reserves could fall to $7.8 billion by the end of June 2018 and, as such, it would be insufficient even for just six weeks of imports.

Recently, Pakistan raised $2.5 billion through Euro and Sakuk bonds, but the amount is far less than what the country requires to avert a balance of payments crisis. In these circumstances, a few billion dollars bonds sales cannot bail us out. Pressure on the balance of payments has been rising and a weakening reserves position is making the job of economic planners difficult in ensuring timely loan repayments. Similarly, repayment obligations will grow on commercial debt besides the maturity of $2 billion Sukuk bonds during the same period. Repayment to the IMF will soon start as well. It is believed that if Pakistan does not mobilise $10 billion within the current financial year, it could face a default situation.

So far, the government has succeeded in obtaining loans from all internal and external sources to avoid default. Given their present mood, international financial institutions (IFIs), foreign commercial banks and other private lending organisations would not oblige Pakistan. The problem has compounded as the United States, which enjoys over 70 percent voting rights in the World Bank and IMF, does not seem to be favouring Pakistan too much at the moment. Former finance minister Ishaq Dar tried to resolve serious economic issues by borrowing right and left which eventually resulted in the accumulation of unprecedented debt.

It is an alarming sign that current account deficit is increasing by over $1 billion every month. It reached an unprecedented $12.4 billion last year despite the reduction of $5 billion in the annual import bill. Failure in increasing exports, home remittances and foreign direct investment (FDI) particularly portfolio investment in stock market has created a serious balance of payment problem. There is a need to take urgent remedial measures, including increasing exports to avoid a financial collapse. There is a growing consensus among official and unofficial quarters that exports need to be given priority in terms of boosting weak foreign exchange reserves that also requires urgent readjustment of the Pakistani Rupee. Devaluation up to 10% could help increase 3% of exports, though the IMF is urging greater downward revision to boost competitiveness.

Needless to say, a home-grown solution to the serious balance of payments crisis has to be found as chances of getting another bailout from the IMF seems difficult. The government must accord the highest priority to exports and should initially start deducting tax against exporters’ refunds. Likewise, a 1.5 to 2% subsidy should be given to export surplus sugar and wheat. Home remittances could be doubled provided some incentives are given to expatriates to send their funds through normal banking channels instead of Hundi and Hawala. Also, new efforts are needed help attract FDI and portfolio investment.

About the author

Mian Bilal