Eco­nomic chal­lenge

The Pak Banker - - FRONT PAGE -

The in­com­ing PTI gov­ern­ment faces a tough eco­nomic chal­lenge. Over the last few months, the coun­try's eco­nomic sit­u­a­tion has wors­ened steeply as the for­eign ex­change re­serves have de­pleted due to widen­ing of cur­rent ac­count deficit and re­pay­ment of pre­vi­ous loans. The cur­rent ac­count deficit stood at $18 bil­lion dur­ing pre­vi­ous fis­cal year. Sim­i­larly, Pak­istani ru­pee is de­pre­ci­at­ing as the dol­lar re­cently had gone be­yond Rs130 last week. It is now back at Rs123 to the dol­lar. As of last week, for­eign ex­change re­serves stood at $9.5 bil­lion, which are enough to cover less than two months' im­ports bill. Re­serves would come un­der fur­ther pres­sure as the coun­try would have to re­pay two bil­lion dol­lars of for­eign loans in the next few weeks.

It is a mat­ter of con­cern that Pak­istan's debt has in­creased to an un­sus­tain­able level of Rs24.5 tril­lion or 72 per­cent of the to­tal size of the econ­omy. The pub­lic debt of Rs24.5 tril­lion in­cludes do­mes­tic debt of Rs16.5 tril­lion and ex­ter­nal debt of Rs8 tril­lion. A high of­fi­cial of the Fi­nance Min­istry re­cently said that debt would rise to 74 per­cent of the GDP dur­ing the on­go­ing fis­cal year. It is rel­e­vant to note here that the Fis­cal Re­spon­si­bil­ity and Debt Lim­i­ta­tion Act, 2005 (FRDLA, 2005) had set the limit that pub­lic debt will not ex­ceed 60 per­cent of the GDP. The econ­omy of Pak­istan is se­ri­ously con­strained by the bal­ance of pay­ments dis­e­qui­lib­rium. Ex­perts have noted that when­ever the real GDP grows above 5 per­cent, cracks start to ap­pear on the ex­ter­nal front. This shows that Pak­istan's ex­port struc­ture does not sup­port growth of the real econ­omy be­yond a cer­tain thresh­old. The low-in­come elas­tic­ity of ex­ports acts as a hur­dle to rapid growth. The sit­u­a­tion also im­plies that real growth in GDP above 5 per­cent re­quires for­eign bor­row­ing. That is the rea­son why the econ­omy had to seek around $11.5 bil­lion in ex­ter­nal fi­nanc­ing in FY18.

The PTI chair­man has ad­mit­ted that the coun­try's econ­omy is fac­ing se­ri­ous chal­lenges. He said that fis­cal and trade deficit are touch­ing all time high lev­els, while the ru­pee is touch­ing his­toric low and pub­lic debt is bal­loon­ing. Khan at­trib­uted all th­ese eco­nomic ills to a dys­func­tional and failed gov­er­nance sys­tem. He vowed to re­duce the cost of do­ing busi­ness and bring in­vest­ment in the coun­try af­ter elim­i­nat­ing cor­rup­tion. Out­lin­ing its eco­nomic pol­icy, PTI in its man­i­festo has said that it would boost the tourism in­dus­try, de­velop the IT sec­tor to build a knowl­edge econ­omy, strengthen in­ter­na­tional trade, re­vi­tal­ize the tex­tile sec­tor and push ex­ports. It would plans to un­leash Pak­istan's po­ten­tial in agri­cul­ture, re­vamp the live­stock sec­tor, build dams, tackle Pak­istan's wa­ter scarcity chal­lenges and re­vive the fish­eries in­dus­try.

Eco­nomic ex­perts have warned that while ini­ti­at­ing long over­due struc­tural re­forms, the newly elected gov­ern­ment may have to ap­proach In­ter­na­tional Mon­e­tary Fund (IMF) for a bailout pack­age to sta­bilise the ex­ter­nal sec­tor. A se­nior leader of PTI has stated that the new gov­ern­ment would de­cide to ap­proach the IMF for fresh bailout pack­age af­ter thor­oughly re­view­ing the eco­nomic sit­u­a­tion and on the ba­sis of brief­ings from the min­istry of fi­nance and Fed­eral Board of Rev­enue. The PTI lead­er­ship is sin­cere and has hon­esty of pur­pose. Given time and re­sources it has the ca­pac­ity to turn the econ­omy around. To this end it should for­mu­late a long term strat­egy to con­vert its eco­nomic vi­sion into re­al­ity.

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