While all the economy indicators being cited by those sitting behind the large oak desks in Islamabad, present quite a rosy picture of Pakistan’s economic health, reality could be far away from this popular narrative.
While we have been documenting here all the versions of fiscal and monetary development reported by government institutes and foreign financial houses, it seems only fair that we also analyze the counter narrative.
On the onset, things look great but sadly every Pakistani is currently under a debt burden of Rs115,000. This emanates from the alarming total debt of the country that has reached Rs23.14 trillion as of 31st December 2016, increasing by 10 percent YoY as per State Bank of Pakistan (SBP).
Reserves and Fiscal Accounts are Badly Shaken
Out of the total debt pie, external debt and liabilities stand at Rs7.8 trillion or approximately $74 billion. The recent government sugar coats these numbers by suggesting that total stock of debt has reduced to 69.1 percent of GDP versus 71.1 percent last year.
The viscous debt cycle is adversely affecting country’s reserves and external accounts. SBP’s foreign exchange reserves have shrunk to $17 billion whereas the current account deficit has expanded by 90 percent during the period of Jul-Jan 2016-17, standing at $4.72 billion.
It is expected that foreign exchange reserves will dampen in the coming months owing to the declining exports, payments to international lenders, on top of the slow growth of remittances.
According to Harald Finger, Mission Chief IMF:
“Both government debt and, related to it, the government’s gross financing needs are high. Under baseline assumptions, we project a gradual decline in the ratio of government debt to GDP through the medium term; but this is subject to uncertainty, and adverse economic shocks could push the debt ratio higher”
Pakistan in Need of Another Bailout Plan
Some of economic gurus are predicting another bailout plan for Pakistan from international donors similar to the one that ended last year. This may come anytime between the mid of 2018.
Dr. Ashfaque Hasan Khan, Principal and Dean, School of Social Sciences and Humanities at the National University of Sciences and Technology (NUST) said:
“Pakistan will need to go to the IMF for another bailout around election time – either right before it or right after it”
He also reiterated that there is stress on the federal foreign exchange reserves. In addition, he also added that government’s financing needs are all set to increase in the coming period. Additionally, external accounts are likely to swell to $7-8 billion that will put more strain on country’s reserve kitty.
Dr. Ashfaque also said:
“There are no more flows from the Coalition Support Fund (CSF). Exports are falling and remittances are unlikely to compensate. They (government) will tell you that the import bill is rising because of CPEC-related machinery. However, that is not the case. Imports under the food and auto vehicles category are rising. Subsequently, this is because the rupee is strong, making imports cheaper”
100 percent Cash Margin required on Certain Imports
SBP also released a statement in which it has imposed 100 percent cash margin requirement on import of certain items. According to the central bank, this decision would decrease imports of certain items but will have minimal impact on the consumption of general public.
Cash margin requirement is imposed on motor vehicles, cellphones, cosmetics, jewelry, home appliances and arms. SBP stated:
“The State Bank expects that this regulatory measure would help accommodate incremental import of growth-inducing capital goods”
The IMF official also said that appreciation of rupee by 27 percent during the last three years has also affected exports to a large extent.
The critics suggest that the government has to refrain from putting baseless taxes on general public in their efforts to get more funding from international lenders. Also, the exchange rate of the country should also be maintained at a competitive level. As a result, a very strong rupee will adversely affect Pakistan’s exports.