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.
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.