A gloomy outlook
The economic situation is going from bad to worse.According to the latest report, Foreign Direct Investment (FDI) witnessed a drop of a massive 26% to $237.9 million in May 2018 as compared to $322.7 million in the same month of last fiscal year. In the last 11 months, FDI decreased 1.3% to $2.47 billion compared with $2.50 billion in the same period of FY17. The decrease in investment comes at a time when the country is facing huge pressure on foreign currency reserves. On the other hand, Pakistan's current account deficit widened to $15.961 billion, or 5.5 percent of Gross Domestic Product, in the first 11 months of the current fiscal year, as the trade gap continued to widen. The biggest concern now is how to finance the huge current account deficit and meet external debt obligations.
The main reason for negative sentiment among foreign investors is the balance of payments. Exports rose by 15.3 percent to $21.345 billion in the July-May period while imports increased by 14.2 percent to $55.232 billion during the first 11 months. Oil imports surged 30.4 percent to $12.928 billion. The SBP's foreign exchange reserves stood at $10 billion during the week ended on June 8, which can cover less than two months' of imports. A fragile external account position has compelled the SBP to allow the decline of Pakistani rupee that has now weakened by over 15% in the last seven months.
At the same time, there was an outflow of $161.9 million from Pakistan Stock Exchange in the July-May period compared with a $391.7 million outflow in the same period of the last year. Remittances from overseas Pakistanis increased 2.8 percent to $18.028 billion in the first 11 months. Net inflows in the power sector rose to $760.5 million in July-May from $633.1 million a year earlier. Construction- related businesses fetched $ 632 million worth of foreign investments in 11 months as against $416.4 million recorded in the corresponding period of FY2017, SBP's data shows.
More problems are ahead as Moody's Investors Service has downgraded the outlook on Pakistan's rating to negative from stable and affirmed the 'B3' local and foreign currency long-term issuer and senior unsecured debt ratings. According to Moody's,"Foreign exchange reserves have fallen to low levels and, absent significant capital inflows, will not be replenished over the next 12-18 months. Low reserve adequacy threatens continued access to external financing at moderate costs, in turn potentially raising government liquidity risks." To add to our difficulties, theADB has cancelled an approved loan of $20 million for project financing. The loan was aimed at strengthening the government's capacity to privatise and restructure its public sector enterprises and strengthening the privatisation programme.
A loan component was also allocated to energy sector reform monitoring, as ADB supported the government's reform activities through sustainable energy sector reform programme from 2013 to 2017. It is reported that the country's energy sector's circular debt soared to Rs 547 billion in June 2018 due to low recovery, high losses and mismanagement. The current wave of load shedding is more out of financial and governance issues rather than for lack of generation capacity.TheSenate Special Committee was recently told that the public sector Generation Companies (Gencos) are producing less electricity due to paucity of funds. Private sector investors have also expressed apprehension that Chinese investors may withdraw their investment from the sector due to late payment of their dues. All in all, it is a gloomy picture on the economic front which will be a big challenge for the new government that will come to power after the next elections.