The most worrisome is the fact that this deterioration in the balance of payments is taking place at a time when the country is having a dysfunctional government with extremely weak and frivolous economic team at the helm of affairs. Furthermore, the country is heading towards a general elections within few months' time. Doling out resources in the name of "Taraqiati Programme" (Development Programme) as well as Programme for the ruling members of the parliament-all to win the election-will be the order of the day.
Such a reckless fiscal stance would fuel aggregate demand which will not only widen fiscal deficit but would also accelerate import demand with a severe repercussion for the current account balance. But who cares, as long as I win the election?
The purpose of this article is to raise concerns for those who matter in this country. Pakistan's balance of payment started deteriorating right after the end of the IMF program in August/September 2016 which speaks volumes about the efficacy of the Program itself. I, Dr Hafiz Pasha and a few other economists knew very well that all the Reviews (sixteen in numbers) of the IMF Program were based on manipulated statistics. Furthermore, these Reviews were deliberately conducted outside Pakistan (UAE) to avoid people who were writing on the Program's outcomes. Such manipulation of statistics was in the knowledge of the IMF staff but they kept their eyes and ears closed.
As soon as the Program ended, the compulsion for manipulating statistics also waned. Furthermore, the country's former finance minister became busy with Supreme Court and JIT and gave little time to 'manage' the economy. The true health of the country's balance of payments started emerging thereafter. The current account deficit which was predicted by the IMF to be $4.7 billion for 2016-17 ended up with $12.4 billion or 4.1% of the GDP. How can the IMF staff go so wrong in forecasting a key macroeconomic variable? The answer is simple: the IMF never wanted to tell the truth. The staff of the IMF was fully in league with the former finance minister in presenting a rosy picture of the economy, thereby misguiding the people of Pakistan.
Pakistan's balance of payments has further deteriorated during the current fiscal year (2017-18). The current account deficit has widened to $7.4 billion or 4.4 percent of GDP during the first half of the fiscal year (July - December 2017) as against the full year target of $9.9 billion and $4.66 billion or 3.1 percent of GDP during the corresponding period of the last year, showing a deterioration of 59 percent. This deterioration has taken place primarily on account of an extraordinary surge in imports (18.8%). Prominent import items that exhibited extra-ordinary growth included Petroleum (26.7%), Transport (24.9%), Machinery (19%) that include telecom (43%), electrical machinery and apparatus (62%) and power generating machinery (26%). Bulk of the contribution to the increase in imports has come from Petroleum (32.3%), machinery (17.1%), agriculture and other chemicals (14.5%) and metal group (12.3%). In other words, more than three fourth (76%) of the contribution to the surge in imports has come from these four groups.
Exports on the other hand did register a reasonable growth (10.8%) after almost five years of perpetual decline. Nearly all (96%) the contribution to export growth came from four items, that is, textile (41.2%), food (25.1%), chemical and pharmaceutical products (22.2%) and petroleum groups (7.2%). It is important to note that this relatively impressive growth in exports owes heavily (93%) to the autonomous rise in international prices of these export items and only 7 percent to the increase in quantity of exports. Should we celebrate the success of much touted export policy?
Inappropriate exchange rate policy appears to have encouraged an extraordinary rise in imports. This is where the IMF staff did not do justice with the IMF Program. IMF believes in maintaining a flexible exchange rate policy, particularly, during the program period and yet they have tolerated a fixed exchange rate regime throughout the program period. Why shouldn't we criticize the IMF for eroding our external competitiveness? Furthermore, the lack of desire to curtail imports through tax and tariff policy further aggravated the external balance of payments situation.
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Balance of Payments
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(Billion $)
Items 2016-17 2017-18
(Forecast)
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Export of Goods 21.9 23.5-24.5
Import of Goods -48.5 -57.0-58.0
Trade Balance (A) -26.6 - 33.5
Service Balance (B) -4.3 -4.5
Income Balance (C) -5.0 -4.9
Goods, Service and Income Balance (A+B+C) -35.9 -42.9
Current Transfers (Net) (D) 23.5 24.9
Current Account Deficit (A + B +C - D) = E -12.4 -18.0
External Debt Servicing (F) 8.2 8.5
Total Financing Requirement (E+F) 20.6 26.5
Likely External Inflows (E) 10.4 14.0-14.5
Financing Gap (E+F - G) 10.2 12.0-12.5
External Debt and Liabilities 83.0 95.0-96.0
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Based on the developments in the first half of the fiscal year, it is safe to predict that exports are likely to end in the range of $23.5-24.5 billion in 2017-18. Imports on the other hand, are likely to be in the range of $57-58 billion with trade balance further deteriorating to $33.5 billion in 2017-18. Net service and net income are likely to be $4.5 billion and $4.9billion, respectively, in 2017-18.With net current transfers projected to be $24.9 billion, the current account deficit is expected to be $18 billion in 2017-18. With $8.5 billion external debt servicing, Pakistan needs $26.5 billion to finance current account deficit and to meet external debt servicing payments requirements.
Pakistan is likely to receive external financing from various traditional sources, Chinese sources, and FDI amounting to $14.0-14.5 billion. This leaves a financing gap of $12.0-12.5 billion in 2017-18. How can we fill this gap? Who will provide $12.0-12.5 billion and at what cost? Who will answer this question?
Pakistan's foreign exchange reserves stood at $13.2 billion by the end-January 2018. How credible is this number? These reserves are borrowed reserves. We built these reserves through massive borrowing all around. Given the developments on external front, as discussed above, pressure on foreign exchange reserves is the logical conclusion. We have lost $3 billion of reserves since the beginning of the current fiscal year, that is, in 7 months. In order to protect the falling reserves at a certain minimum level, the State Bank of Pakistan (SBP) has resorted to borrowing from commercial banks in forward markets which amounts to $5.4 billion by the end December 2017. In other words, Pakistan's official foreign exchange reserves atthe end-December 2017 stood at$8.662 billion and not $14.1 billion as reported by the SBP. It is unfortunate that the SBP is hiding facts from the nation by not telling the truth. Accounting gimmickries will not serve the purpose. It is better to tell the truth however bitter it may be, rather than hiding the facts.
The above analysis clearly suggests that Pakistan's foreign exchange reserves will not be sufficient to meet the financing gap of $12.0-12.5 billion for the current year. Where should then Pakistan go to get the additional external flows? In normal circumstances, the country goes to the IMF for additional external flows to meet financing gap. Is Pakistan ready to go the IMF once again? The present government has clearly stated that it would not seek financial support from the IMF.
What is then the strategy of this government for the remaining period of the tenure? In the absence of seeking support from the IMF, the only option left for the government is to borrow from right and left. It appears from the government strategy that it will borrow from wherever it is possible to survive for a few more months. Once the tenure of this government is over, they will tell the people that they did not go to the IMF, as promised.
What will happen to the new government then? Will the caretaker government start negotiating with the IMF for a new program? It is clear that the IMF will not approve any new program with the caretaker government. Most probably, the caretaker government may start negotiation at least on a broad framework of the program and let the new government sign the agreement, if they desire.
In this writer's view, Pakistan should not think of going to the IMF in the presence of deteriorating US-Pakistan relations. Pakistan will be asked to take certain prior actions which it may not like to do. This is an opportunity for Pakistan to live without the clutches of the IMF. There are many alternatives that Pakistan can explore to meet its external financing requirement. Deft policy handling, good economic team, support from the leadership, structural reforms along with alternative available modes of financing would prevent Pakistan from facing serious balance of payments crisis.
The bottom line is that the present regime has severely damaged the economy and its key institutions. It has made Pakistan highly vulnerable to external shocks and drowned the country under debt. Has this been done deliberately or was it sheer incompetence of the leadership and its economic team? This writer leaves it to the people to judge for themselves.
(The writer is Principal and Dean at NUST School of Social Sciences and Humanities, Islamabad. Email: [email protected])