THE decision to approach the International Monetary Fund provided comfort to economic stakeholders as the prospective bail-out package will help Pakistan dodge the immediate danger of a sovereign default. It is not expected, however, to automatically solve all problems weighing on future economic prospects.
A major challenge would be to contain the fallout of the economic slowdown on households and investors. The petrol, gas and electricity rate hike and their multiplier effect will significantly jack up cost of living and doing business. The slowdown has shrunk trading volumes in the market. Many brokerage houses, trading firms and mutual funds have already started cutting corners and firing staff on the fringes.
During a recent interaction with top businessmen in Karachi, Razak Dawood, advisor to the prime minister for commerce, articulated what he termed the major economic challenge. “Stopping deindustrialisation, which is an onerous task but not impossible. The industrial base needs to be reinvigorated. The government has focused itself on a doable export-led growth strategy and is working to remove duties for all imported raw material.”
“Sure. The million dollar question is: where is the new investment is going to come from?” commented a big gun privately.
Austerity measures, tightening of the monetary policy, falling rupee dollar parity, upward revisions of utility rates and the growing wedge of confidence between the private sector and the government mean more challenging private investment prospects going forward.
No one in business circles expects the cash starved and debt ridden government, with a harsh lender breathing heavy on its neck to invest liberally in the current phase. At the same time it would be absurd to assume that the private sector can be mobilised unless it finds the activity sufficiently safe and financially rewarding.
The fact is that the risk-averse private sector did not respond when the past governments attempted to expand the base of the economy by offering a low credit cost environment unless returns were guaranteed.
The current economic downturn, reflected in depressing trends in capital, currency, commodity, retail and property markets, are symptomatic of a deeper malice. The indecisiveness of the ruling party, since it assumed power two months back, played a part in exposing the fact but even ardent supporters of the last PML-N government will not refute that the high growth it achieved was not well grounded.
Some businessmen, economists and officials were approached to pick their mind on the crucial step, in their opinion, that can steer the economy out of this tight corner. The responses were swift but reflected a lack of consensus in the relevant circles.
Mr Salim Raza, former governor, State Bank of Pakistan, responded in writing. “Setting the right agricultural choices is important. We have to subsidise wheat and sugar exports because of a production surplus. To this end the government set rates above world prices.” He advocated that land surplus be diverted to edible oil crops (rapeseed, canola, mustard, etc), which have been taken over by sugarcane and wheat, to curtail edible oil imports.
Mr Shaukat Tarin, former finance minister, admitted that there is no single ‘ready’ solution. “It is most important that we all start paying taxes judiciously,” he says.
Mr Muhammad Ali Tabba, chairman, the Pakistan Business Council and CEO Lucky Cement said that “the country needs expansion of tax base and an increase in exports.”
A senior official admitted that under the IMF’s guardianship growth will suffer in the short run. “In the medium- to long-term the only way out is to excite the private sector to invest in Pakistan. These non-debt creating financial flows will ease out the stringent balance of payments situation. This is possible through orderly, business-friendly structural reforms besides changing the bureaucratic mindset,” he said.
“I would recommend tariff and trade policy reforms to get exports moving. That’s what India did after their bailout in 1992. Nothing else will work. Other options include substantially reducing the defence expenditure and privatising state owned enterprises,” opined Dr Manzoor Ahmad, former Pakistan ambassador to the World Trade Organisation.
Shabir Ahmed, chairman Pakistan Bed Linen Manufacturers and Exporters Association wanted the government to focus on the economy. “Stop the witch hunt. The FIA involvement is scaring overseas joint venture partners”, he said. Terming public name calling of suspected tax evaders irresponsible he thought that the PTI is punishing the business class for its own failings (being ill prepared to deal with challenges on hand).
“Zero duties and taxes on import of machinery plus loans for plant upgradation machinery on a rate permissible under the export finance scheme can help,” responded Majyd Aziz, president Employers Federation of Pakistan.
Eizaz Sheikh, president Cement Manufacturers Association of Pakistan advised reducing imports and stay away from meddling in the housing construction business to avoid financial scandals.
Published in Dawn, The Business and Finance Weekly, October 15th, 2018
ISLAMABAD: The Pakistan Tehreek-i-Insaf (PTI) and the Communist Party of China have signed a memorandum of understanding (MoU) to strengthen party-to-party relations.
During an event held at the Foreign Office, Foreign Minister Shah Mehmood Qureshi and Chinese minister Song Tao signed the MoU.
PTI secretary general Arshad Dad, Senator Dr Shahzad Waseem and other party leaders were present on the occasion.
“Witnessed MoU signing ceremony between Communist Party of China and Pakistan Tehreek-i-Insaf to further strengthen party to party relations,” Senator Shahzad Waseem tweeted after the event.
Mr Qureshi tweeted: “China is an all weather friend and strategic partner. We start a new chapter in our relations with the signing of an MoU between PTI and the Communist Party of China. A regular exchange of ideas will help both countries and political parties to combat the challenges we face today.”
The two parties also agreed to exchange high-level delegations to further understand each other, bring the two nations closer to each other and to address the issues.
Earlier on Saturday, the Chinese delegation visited the PTI secretariat where it was received by Arshad Dad.
China has been playing an important role in addressing the issues of Pakistan. Tens of billions of dollars have been invested in Pakistan under the CPEC which is a framework of regional connectivity. The CPEC will not only benefit China and Pakistan but will also have a positive impact on Iran, Afghanistan, India, Central Asian Republics and the region.
Published in Dawn, October 15th, 2018
Prime Minister Imran Khan, via Twitter on Friday, announced that the government will announce a "special package of incentives" for overseas Pakistanis to encourage them to send remittances through banking channels.
PM Khan said that by "removing hindrances and procedural issues", the government will be able to increase the inflow of remittances from $20bn to "at least $30bn and perhaps even $40bn".
"The Philippines did this successfully," he added.
PM Khan also vowed to remove problems faced by overseas Pakistanis during the immigration process when they come to Pakistan. He added that Pakistani missions abroad had also been ordered by the government to "look after and deal effectively with the concerns" of overseas Pakistanis.
He assured that his administration will take steps to protect overseas Pakistanis' property and assets in the country, "especially from land mafias".
Overseas Pakistanis form a significant part of PM Khan's administration. Weeks after his party won the July 25 election, Finance Minister Asad Umar declared that the Pakistan Tehreek-i-Insaf government will focus on growing home remittances to supplement foreign exchange inflows.
WASHINGTON: The United States said that it will examine closely Pakistan request for a loan from the International Monetary Fund(IMF), adding that “part of the reason that Pakistan found itself in this situation is Chinese debt”.
Asked at a Thursday news briefing how would the United States deal with Pakistan’s request, State Department spokesperson Heather Nauert said: “In all cases, we examine that closely from all angles of it, including Pakistan’s debt position, in evaluating any type of loan programme”.
Ms Nauert also blamed Pakistan’s loan arrangement with China for the country’s economic woes.
“I think part of the reason that Pakistan found itself in this situation is Chinese debt and the fact that there is debt that governments have incurred that they maybe thought wouldn’t be so tough to bail themselves out of, but has become increasingly tough,” she said.
On Tuesday, IMF chief economist Maurice Obstfeld urged Pakistan to review the loans it was receiving from China and avoid “excessive debts which cannot be repaid”.
Recently, a bipartisan group of 16 US senators claimed in a joint statement that China’s Belt and Road Initiative, which also funds projects in Pakistan, was a debt-trap. The recipients often found themselves deeply in debt to China and were forced to make painful concessions, they warned.
In an interview to a US television network CNBC in July, Secretary of State Mike Pompeo said that the United States would not allow Pakistan to use the US taxpayers’ dollars to repay China.
“Make no mistake: We will be watching what the IMF does,” he said.
Pakistani officials reject this argument, pointing out that their indebtedness to China is much smaller than imagined.
In an official statement issued in August, Islamabad pointed out that “China stepped forward to support Pakistan’s development at a time when foreign investment had dried up and economic activity was being crippled by energy shortages and infrastructure gaps”.
The United States is the largest contributor to the IMF and has 17.68 per cent of voting rights in major decisions. China is third, behind Japan, and controls 6.49 per cent of the vote.
In response to a separate question, Ms Nauert confirmed that an ambassadorial appointment for Pakistan “is in the pipeline”.
Published in Dawn, October 13th, 2018
ISLAMABAD: The World Bank has said that Pakistan’s ability to withstand external shocks has diminished and risks will remain predominantly on the downside with declining reserves and elevated debt ratios.
In its South Asia Economic Focus titled ‘Budget Crunch’ released on Sunday, the World Bank says appropriate policy responses to correct these imbalances and increased buffers to absorb future shocks will reduce these risks and support a positive growth outlook.
Such responses would entail increased flexibility of the exchange rate, strengthening the fiscal position through renewed efforts to improve revenue collection and better coordination between federal and provincial governments to reduce public spending, the report says.
World Bank suggests immediate macroeconomic adjustments to correct large deficits
The country’s macroeconomic situation remains fragile. Consumption-led growth is expected to slow down due to fiscal and possibly monetary tightening. However, short-term measures for fiscal consolidation and export growth need to be complemented with implementation of medium-term structural reforms to uplift the economy out of frequent boom-and-bust cycles.
The report suggests that immediate macroeconomic adjustments are required to correct the large deficits. Rising global interest rates and tighter liquidity situation will pose challenges to Pakistan given the high gross external financing requirements.
The World Bank projected GDP growth to decelerate to 4.8 per cent in fiscal year 2019 as authorities are expected to tighten fiscal policy to correct imbalances. However, growth is expected to recover in fiscal year 2020 and reach 5.2pc as macroeconomic conditions improve. This recovery is conditional upon the restoration of macroeconomic stability, a supportive external environment, including relatively stable international oil prices, and a strong recovery in exports.
Inflation is expected to rise to 8pc (average) in 2019 and remain high in 2020, driven by exchange rate pass through to domestic prices and a moderate increase in international oil prices. The pressure on the current account is expected to persist and the trade deficit is projected to remain elevated over the next two years.
Remittances will continue to partly finance the current account deficit, although slower growth in member countries of the Gulf Cooperation Council will affect remittances. Foreign direct investment, multilateral, bilateral, and private debt-creating flows are expected to be the main financing sources in the near to medium term. The fiscal deficit is projected to narrow in 2019 due to post-election adjustments and some fiscal measures.
It is expected that there will be some scaling down of public investment spending at the federal and provincial levels, and increase in revenue collection through tax base expansion and other administrative measures.
Fiscal consolidation would improve debt dynamics, but the public debt-to-GDP ratio is expected to stay around 70pc of GDP during 2019 and 2020.
Growth deceleration and higher inflation are expected to slowdown poverty reduction in fiscal year 2019, though overall poverty decline is projected to continue reflecting GDP growth. The presence of safety net programmes will mitigate the negative impact of inflation on poverty.
The current account deficit increased to 5.8pc of GDP in fiscal year 2018, up from 4.1pc in fiscal year 2017. The widening current account deficit reflects the growing trade deficit as exports are not growing as fast as imports. Imports are growing fast due to high domestic demand and import-intensive investments related to the China-Pakistan Economic Corridor.
The State Bank intervened heavily in the foreign exchange market in the first half of 2018 to maintain the value of the rupee, resulting in a large decline in international reserves from $16.1 billion (2.9 months of imports) at end-June 2017 to $10.2bn (or 1.7 months of imports) by Aug 24, 2018.
Under intense market pressure, the currency depreciated by almost 18pc between Dec 1, 2017, and July 25, 2018. Post-election, with emerging political certainty, the rupee recovered three percentage points against the US dollar and was trading at Rs124.3 per dollar on Sept 7.
The fiscal deficit has widened over the past two years — reversing fiscal consolidation efforts in previous years and raising public debt levels. The 2018 fiscal deficit (including grants) reached 6.5pc of GDP — a slippage of 2.5 percentage points compared to the budget target. This was due to limited revenue growth and large increases in recurrent spending at both the federal and provincial levels.
Consequently, Pakistan’s public debt reached 73.5pc of GDP by end-June 2018, significantly raising debt-related risks. The newly elected government recognises the need for macroeconomic adjustments to overcome these challenges and has already announced its plans to cut expenditures, improve the management of state-owned enterprises, and undertake revenue mobilisation reforms, the report says.
Published in Dawn, October 8th, 2018