Pak­istan’s Trou­bled Econ­omy

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Af­ter giv­ing a clean bill of health to the Pak­istani econ­omy in all its 12 re­views, the of­fi­cials of the In­ter­na­tional Mon­e­tary Fund (IMF) have for the first time ex­ten­sively talked about the ris­ing ex­ter­nal debt, de­clin­ing for­eign in­vest­ment, col­laps­ing ex­ports, weak­en­ing rev­enue and fail­ure in un­der­tak­ing en­ergy sec­tor re­forms.

The lat­est IMF re­port re­leased at the con­clu­sion of three year $6.65 bil­lion bailout Ex­tended Fund Fa­cil­ity (EFF) pack­age re­veals that all is not well on both the in­ter­nal and ex­ter­nal fronts.

The tim­ing for the re­lease of the re­port is be­ing termed as very sig­nif­i­cant be­cause the IMF‘s pro­jec­tions about the econ­omy did not even­tu­ally come true, forc­ing its of­fi­cials to change their stance on var­i­ous is­sues.

Ex­ter­nal debt, now stand­ing at $73 bil­lion and feared to be reach­ing $90 bil­lion in next two years, is one the se­ri­ous is­sues that is fast be­com­ing a ma­jor con­cern of ev­ery cit­i­zen. The pace with which the cur­rent gov­ern­ment has been bor­row­ing is re­port­edly caus­ing prob­lems to the of­fi­cials of the min­istry of fi­nance and the cen­tral bank to man­age debt re­lated is­sues.

The mat­ter com­pounded with the col­lapse of ex­ports, leav­ing Pak­istan be­hind even Bangladesh and Sri Lanka. Ex­ter­nal debt to ex­port ra­tio has reached 300 per­cent com­pared to 120 per­cent of In­dia and 100 per­cent of Bangladesh.

It is in that back­drop crit­ics have started say­ing that Pak­istan is fast en­ter­ing into a debt trap, pro­vid­ing an op­por­tu­nity to the In­ter­na­tional Fi­nan­cial In­sti­tu­tions (IFIs) to of­fer new loans on tough con­di­tions.

The IMF, how­ever, re­port avoided to of­fer some de­tailed ac­count of ris­ing un­em­ploy­ment and poverty and other so­cial in­di­ca­tors across the county. There is 30 per­cent un­em­ploy­ment among the grad­u­ates. To­day the gov­ern­ment is pro­vid­ing 700,000 jobs an­nu­ally com­pared to 1.4 mil­lion of 2013-14, which is worse than Bangladesh.

Ex­ter­nal debt amount­ing to $73 bil­lion, ac­cord­ing to them IMF should have been at $58.6 bil­lion by June 2016. ”Ex­ports have been de­clin­ing, pri­vate in­vest­ment in­clud­ing For­eign Di­rect In­vest­ment (FDI) too low to sup­port higher growth, pub­lic debt is still too high,” the IMF said in its re­port.

The ob­vi­ous ques­tion be­ing asked by the in­de­pen­dent econ­o­mists is how come IMF’s es­ti­mates went so wrong about the Pak­istani econ­omy and that why it did not raise these is­sues in all the 12 re­views. On the con­trary, the Fund of­fi­cials talked about the re­vival of the econ­omy and sta­bil­i­sa­tion in all sec­tors. In Septem­ber 2013, IMF es­ti­mated that ex­ports would peak at $31 bil­lion by June 2016 from $24.5 bil­lion, which ac­tu­ally fell to just $20.8 bil­lion by June 2016.

This shows that there had been a mas­sive re­duc­tion of $10.2 bil­lion in ex­ports re­ceipts dur­ing the last three years and would any­body ask the gov­ern­ment where the much trum­peted eco­nomic turn­around is?

The min­istries of fi­nance and com­merce have been hold­ing re­spon­si­ble low in­ter­na­tional oil and com­modi­ties prices that caused re­duc­tion in ex­ports. But other fac­tors like un­real ex­change rate and bad gover­nance are not be­ing men­tioned for de­clin­ing ex­ports.

“We do see a de­cline in ex­ports go­ing for­ward due to ap­pre­ci­a­tion of real ef­fec­tive ex­change rate and gover­nance chal­lenges and power out­age,” said Harold Fin­ger, IMF mis­sion chief in Pak­istan. Re­gret­tably, he used to sound very pos­i­tive about the fast im­prov­ing big­ger eco­nomic in­di­ca­tors dur­ing his pre­vi­ous news con­fer­ences. What about his ear­lier claims that macro-eco­nomic sit­u­a­tion has sta­bilised and that far less vul­ner­a­bil­i­ties are be­ing faced by the gov­ern­ment?

He and his other col­leagues used to say ev­ery now and then that ex­ter­nal buf­fers (re­serves) have been strength­ened, in­fla­tion is down, fis­cal deficit is de­creas­ing and struc­tural re­forms are on track. But in the new re­port, IMF has ad­mit­ted that the sit­u­a­tion on ex­ter­nal debt, fis­cal deficit, FDI, re­mit­tances and rev­enues is not sat­is­fac­tory and needs at­ten­tion of the gov­ern­ment.

“There are land­mines be­ing laid by the fi­nance min­is­ter and whoso­ever comes next will be at a loss to fix things,” said Ash­faque Hasan Khan, se­nior econ­o­mist and Dean of So­cial Sciences at Na­tional Uni­ver­sity of Sci­ence and Tech­nol­ogy (NUST).

He said the lat­est IMF re­port is an ac­cep­tance of what in­de­pen­dent econ­o­mists have been say­ing all along that the Wash­ing­ton-based agency is ‘part­ner in crime’ and gave waivers af­ter waivers to un­duly sup­port the


One of the ma­jor ques­tions be­ing asked in the con­cerned quar­ters is that how the gov­ern­ment would pull through dur­ing the cur­rent fi­nan­cial year and be­yond. The gov­ern­ment is run­ning its fi­nan­cial af­fairs by ruth­lessly bor­row­ing and so far ac­quired funds worth Rs1,682 bil­lion which in­cluded Rs660 bil­lion of the power sec­tor, Rs622 bil­lion of the com­mer­cial banks in con­nec­tion with the com­mod­ity op­er­a­tion, with­hold­ing of Rs200 bil­lion sales tax re­funds of the ex­porters and by charging Rs260 bil­lion ad­vance tax. This all hap­pened be­cause of slow pace of re­forms par­tic­u­larly in the en­ergy and rev­enue sec­tors.

The IMF was orig­i­nally set up to pro­mote in­ter­na­tional eco­nomic co­op­er­a­tion and pro­vide its mem­ber coun­tries with short term loans to achieve bal­ance of pay­ments by trad­ing with other coun­tries. But now IMF is of­ten ac­cused of act­ing like a global loan shark, ex­ert­ing huge lever­age over the economies of more than 60 coun­tries. These coun­tries have to fol­low the IMF’s poli­cies to get loans, in­ter­na­tional as­sis­tance and even debt re­lief.

More iron­i­cally now IMF de­cides how much debtor coun­tries can spend on ed­u­ca­tion, health care and en­vi­ron­men­tal pro­tec­tion. It is gen­er­ally be­lieved that IMF is one of the most pow­er­ful in­sti­tu­tions on earth.

Ac­cord­ing to former gover­nor of cen­tral bank Dr Ishrat Hus­sain, road to pros­per­ity needs sound macroe­co­nomic and ex­ter­nal sec­tor man­age­ment, en­ergy sec­tor re­struc­tur­ing, re­vamp­ing of tax pol­icy and ad­min­is­tra­tion, trans­fer of non­strate­gic as­sets, ex­port sec­tor re­vival and em­pow­er­ment and strength­en­ing of lo­cal govern­ments.

He sees the suc­cess­ful com­ple­tion of IMF’s three year EFF as a tool to sta­bi­lize the econ­omy. How­ever, he is very con­cerned about de­cline in ex­ports, stag­na­tion in home re­mit­tances, en­ergy short­ages and in­crease in cir­cu­lar debt, widen­ing of cur­rent ac­count deficit (up from $500 mil­lion to $1.3 bil­lion in the first three months of the cur­rent fi­nan­cial year) and the end­ing of US Coali­tion Sup­port Fund (CSF).

More­over, the bleed­ing state sec­tor en­ter­prises have in­creased the gov­ern­ment’s fi­nan­cial woes in many ways. On one hand there is a stalled pri­vati­sa­tion pro­gramme and on other hand these util­i­ties are in­cur­ring huge losses. Ac­cu­mu­la­tive losses of PIA, Steel Mills, Pak­istan Rail­ways and the power sec­tor to­day stand at Rs 1.356 tril­lion and for the first time the IMF re­port ac­knowl­edged it by ad­vis­ing the gov­ern­ment to take cor­rec­tive mea­sures to stop their grow­ing an­nual losses.

Power sec­tor re­mains the num­ber one prob­lem of the gov­ern­ment as its losses both trans­mis­sion and lines have come down just by five per­cent­age point but they are far from be­ing sat­is­fac­tory. The losses of PIA, rail­ways and steel mills along with power sec­tor have turned out to be more than the an­nual de­vel­op­ment pro­gramme of the coun­try.

Crit­ics gen­er­ally blamed the pri­va­ti­za­tion min­istry for in­ac­tion par­tic­u­larly on the part of its min­is­ter for not do­ing enough to sell the state sec­tor en­ti­ties. He is busy de­fend­ing the gov­ern­ment on tele­vi­sion talk shows rather than look­ing af­ter the highly sub­dued pri­vati­sa­tion process in the coun­try. So is the sit­u­a­tion in Board of In­vest­ment (BoI) whose boss is also found in­dulging in po­lit­i­cal mat­ters by reg­u­larly ap­pear­ing in talk shows.

Ma­jor trans­ac­tions in­clud­ing PIA, Steel mills, power util­i­ties, rail­ways, OGDCL and many oth­ers await pri­vati­sa­tion. There is no doubt that in­ter­na­tional re­sponse for pri­va­ti­za­tion is weak in most of the coun­ties but then some­thing is be­ing done ev­ery­where in terms of mak­ing the loss mak­ing pub­lic sec­tor units into prof­itable ones and pre­par­ing them for their even­tual dis­in­vest­ment. But in Pak­istan, the sit­u­a­tion is to­tally dif­fer­ent as the high ups of the pri­vati­sa­tion are busy else­where to save their lead­er­ships in the me­dia.

Gone are the days when for­eign in­vestors used to visit Pak­istan reg­u­larly and make in­vest­ment both in the pub­lic and pri­vate sec­tors. FDI has come down to less than $900 mil­lion as against $5.5 bil­lion of 2007-2008.

Lo­cal in­vestors are hes­i­tant to make lot of in­vest­ment be­cause of the ever in­creas­ing po­lit­i­cal un­cer­tainty and the gov­ern­ment seems busy to tackle its sur­vival prob­lems and hardly finds time to ad­dress the is­sues of the in­vestors and busi­ness­men. The trad­ing com­mu­nity, which has al­ways been in favour of the PML(N) gov­ern­ment , is much con­fused be­cause of var­i­ous is­sues in­clud­ing 0.3 per­cent with­hold­ing tax on all trans­ac­tions. The in­crease in GST rate rang­ing from 16 to 50 per­cent is an­other ir­ri­tant that is caus­ing prob­lems to the busi­ness­men and ex­porters. The gov­ern­ment could not of­fer any re­lief to the ag­i­tat­ing busi­ness and trad­ing com­mu­nity in this be­half.

The good thing is IMF did not mince words this time and talked about the prob­lem ar­eas of the Pak­istani econ­omy. Though the gov­ern­ment has said it does not re­quire any new loan pack­age, it is gen­er­ally be­lieved that ex­ter­nal debt li­a­bil­i­ties will start ap­pear­ing soon that will force the new gov­ern­ment af­ter 2018 elec­tion to yet again go to IMF for bailout pack­age. The loan alone taken by the PML (N) gov­ern­ment dur­ing last three years is worth $14 bil­lion, re­pay­ments of which by no means are an easy task for any suc­ceed­ing gov­ern­ment.

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