Pakistan economy: Wake-up call | By Rashid A Mughal, US


Pakistan economy: Wake-up call

THE economic indicators for Pakistan are getting scary with every passing day. Economy is currently trapped in low growth, high inflation and unemployment, falling investment, excessive fiscal deficits, and a deteriorating external balance position.

According to World Bank, Pakistan’s economy has slowed down while Inflation has risen after catastrophic floods.

Pakistan’s economy is expected to grow by only two per cent in the current fiscal year ending June 2023.

Imports rose 42% to a record $80b in the last financial year; exports also hit a record of nearly $32b but grew 25%.

Pakistan, has long struggled with its external accounts, and the IMF has bailed it out over 20 times since 1958.

Pakistan’s economic freedom score is 48.8, making its economy the 153rd freest in the 2022 Index.

Pakistan is ranked 34th among 39 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.

Pakistan’s external debt rose from $34b in 2021 to $38b in 2022 and is expected to rise to $40b in 2023.

In the fiscal year 2022-23, Pakistan’s total debt servicing payment is estimated to be 3.95 trillion Pakistani rupees ($17.9b).

Public debt (as of March 2022) was 4.44 trillion rupees (72.5% of GDP). Pakistan’s tax governance remains weak.

The increasing burden of huge foreign loans have impeded the economic growth prospects of Pakistan.

The lack of political stability demanded huge public expenditure for maintaining law and order in the country.

This huge public expenditure acted as a massive drain on the country’s economic resources.

Pakistan’s strategy to reduce its debt burden to a sustainable level includes commitment to run primary surpluses, maintain low and stable inflation, promote measures that support higher long-term economic growth and follow an exchange rate regime based on economic fundamentals.

Pakistan’s external debt is predominantly held by the public sector and mainly sourced from concessional multilateral and bilateral sources.

The country’s foreign loans are 36% of its total debt. According to Reuters, concerns are rising over the health of Pakistan’s economy as foreign reserves run low, the local currency weakens and inflation stands at decades-high levels despite the resumption of an IMF funding programme in August which was meant to stabilise an economy that has been in a tailspin for months.

The country has suffered from external shocks, like other developing nations, heavily reliant on imports of oil, gas and other commodities.

Floods in late August killed more than 1,500 people and caused billions of dollars worth of damage, heaping even more pressure on its finances.

The biggest worry centre’s around Pakistan’s ability to pay for imports such as energy and food and to meet sovereign debt obligations abroad.

Foreign exchange reserves with the central bank stand at $8b and commercial banks hold another $5.7b. That covers imports for barely a month, despite IMF funding.

Pakistan’s rupee has weakened 20% since the start of the year and hit its weakest level on record in August, reflecting both the country’s fragile financial situation as well as the strong dollar itself.

The decline in the currency is pushing up the cost of imports, borrowing and debt servicing, and in turn will further exacerbate inflation running already at a multi-decade high of 27.3%.

Immediate solutions include financing and compressing demand for imports, but needs are rising after the floods.

Increased financing from other multilateral lenders, including Saudi Arabia, the UAE and Qatar that have pledged some $5b in investment, would boost both finances and confidence.

Energy payment facilities from Riyadh and Doha, from whom Pakistan buys LNG will also ease pressure on the country’s current account.

Pakistan is talking to bilateral debt holders, including the Paris Club, to restructure payments.

But China is the key, holding nearly $30b of Pakistan’s debt, including loans by its state-owned banks.

Pakistan has never defaulted on external debt obligations. The Central Bank chief and the former finance minister have stressed that it was not facing imminent default.

The government needs to pay $1b on bonds maturing in December. It has interest payments worth around $600m for the 2022-23 fiscal year but the next full bond redemption is not until April 2024.

All major credit ratings agencies have lowered their outlook since June – all rate the country as highly speculative and risky though officials say the country will be able to meet short-term repayments.

The crisis has been fuelled by political turmoil and external shocks from the global commodity crunch.

Typically, a third of Pakistan’s import payments relate to energy. In the last financial year, petroleum group imports, including LNG, more than doubled to $23.3b from a year earlier, according to the statistics bureau.

Most of electricity is produced using LNG, prices of which remain elevated and which will be in shorter supply with the winter approaching.

Higher energy bills propelled Pakistan’s current account deficit to over $17b – close to 5% of GDP – in the last financial year, six times higher than 2020-21, despite record high remittances from abroad.

An overheating economy also contributed to the widening deficit. Imports rose 42% to a record $80b in the last financial year; exports also hit a record of nearly $32b but grew 25%.

Pakistan has limited industrial production capacity and failed to develop ways of substituting imports during times of economic expansion, leaving it vulnerable to external shocks.

The slower growth will reflect damages and disruptions caused by catastrophic floods, a tight monetary stance, high inflation and a less conducive global environment.

Poverty in the hardest-hit regions is likely to worsen in the context of the recent flooding.

Preliminary estimates suggest that — without decisive relief and recovery efforts to help the poor – the national poverty rate may increase by 2.5 to 4 percentage points, pushing between 5.8 and 9m people into poverty.

Macroeconomic risks also remain high as Pakistan faces challenges associated with a large current account deficit, high public debt, and lower demand from its traditional export markets amid subdued global growth.

The continuing economic problems have been caused by inconsistent economic policies, pursuit of the wrong priorities, and bad governance.

This is why Pakistan has not significantly developed over the last 75 years. Fiscal policies have also lacked consistency—subsequent governments changed policies to prioritize certain sectors, resulting in unstable economic conditions.

The economic situation is not the only concern. Pakistan is in the grip of political instability too which needs to be looked into to urgently correct the course.

—The writer is former Civil Servant & Consultant: ILO and IOM.