Pak­istan: Who needs a cri­sis?

Pak­istan’s bal­ance of pay­ments cri­sis pro­vides an arena for a proxy stand-off be­tween the coun­try’s for­mer ally, the United States, and China, for which Pak­istan is eco­nom­i­cally and strate­gi­cally im­por­tant.

FrontLine - - OBITUARY -

WITH Im­ran Khan’s Pak­istan Tehreek-e-in­saaf (PTI) or “Move­ment for Jus­tice” win­ning 116 of the 272 seats filled through election to Pak­istan’s Na­tional As­sem­bly, the for­mer crick­eter has been in­stalled as his coun­try’s Prime Min­is­ter. So at­ten­tion has now shifted to how he will ad­dress the “cri­sis” the coun­try faces. It is not a cri­sis of growth. Pak­istan has reg­is­tered year-on-year growth rates ex­ceed­ing 5.4 per cent in three con­sec­u­tive years end­ing fi­nan­cial year 2017-18, a record matched in this cen­tury only in the glob­ally-syn­chro­nised, high-growth years 200307. Nor could it be iden­ti­fied as a cri­sis of ex­treme in­equal­ity or deep poverty, since that is a prob­lem that has af­flicted Pak­istan ever since its cre­ation and char­ac­terises most less­de­vel­oped coun­tries, in­clud­ing neigh­bour­ing In­dia.

The prob­lem lies in Pak­istan’s bal­ance of pay­ments or ex­ter­nal ac­count. Ex­ports have been slug­gish for rea­sons ex­ter­nal and do­mes­tic, whereas im­ports have risen, partly be­cause of a ris­ing oil im­port bill, and partly be­cause growth rode on a wave of im­port-in­ten­sive spend­ing un­der the pre­vi­ous regime. The three dom­i­nant cat­e­gories of im­ports were ma­chin­ery, pe­tro­leum and other chem­i­cals, with pe­tro­leum ac­count­ing for much of the in­crease be­tween the year end­ing June 2016 and the year end­ing June 2018. As a con­se­quence the trade deficits widened; and with re­mit­tances stag­nant for a few years now, the cur­rent ac­count deficit or the ex­cess of for­eign exchange spend­ing rel­a­tive to cur­rent re­ceipts of for­eign exchange also in­creased. It did not help that with a rise in ex­ter­nal debt-fi­nanced spend­ing, in­ter­est pay­ments on for­eign bor­row­ing were also on the rise. The trade deficit, which stood at $3.9 bil­lion in the first quar­ter of 2015, rose to $8.8 bil­lion in the first quar­ter of 2017 and $10.5 bil­lion in the sec­ond quar­ter of 2018. Si­mul­ta­ne­ously, the cur­rent ac­count deficit rose from $2.8 bil­lion in 2015 to $7.1 bil­lion in 2016 and $15.8 bil­lion in 2017. Rel­a­tive to the GDP, the cur­rent ac­count deficit rose from 1.0 per cent in 2015 to 5.2 per cent in 2017.

As is in­evitable, this could be sus­tained only be­cause of cap­i­tal in­flows, which were sub­stan­tially in the form of bor­row­ing. Out­stand­ing ex­ter­nal debt rose from $62.7 bil­lion at the end of March 2015 to $70.4 bil­lion at the end of March 2016, $77.9 bil­lion at the end of March 2017, and $91.8 bil­lion at the end of March 2018. But that alone was in­ad­e­quate to fi­nance the ris­ing ex­ter­nal deficit, and of­fi­cial liq­uid re­serves had to be run down from $18.1 bil­lion at the end of fi­nan­cial year 2015-16 to $9.8 bil­lion at the end of 2017-18. This has trig­gered a sharp de­pre­ci­a­tion of the Pak­istani ru­pee from 105.5 to the dol­lar in Novem­ber 2017 to 119.4 to the dol­lar in June 2018 or by 13 per cent in seven months.

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