Salvaging Pakistan’s economy



Mohammad Jamil

IT is unfortunate that a resourceful country has been brought to the present pass due to the flawed policies of successive governments. For quite some time, Pakistan is facing fiscal deficit, trade deficit and current account deficit. The reason for fiscal deficit is that we earn less and spend more, and reason for trade deficit is that we export less and import a lot more. In 2017-18 Pakistan’s total import bill was around $59 bn and exports were registered at little more than $23 bn; hence trade deficit of $ 36 bn. After taking into account remittances from expatriate Pakistanis around $20 billion, current account deficit was $16 bn. In 2016-17 current account deficit was $15 bn; however this deficit is not manageable. Assad Omer, Finance Minister in the incoming government has hinted that Pakistan would need $12 bn package from the IMF.
Since 2014, our exports substantially declined from $24 to $19 bn; however with additional incentives to exporters and depreciation of Pakistani currency, it increased to $23 bn in 2017-18. According to experts, our industry could no longer compete in the international market due to an overvalued rupee and the relatively high cost of electricity, gas and other inputs. The government functionaries have been arguing that increase in imports is due to extraordinary growth of the economy, which is not true, as despite best efforts it continues to show a moderate growth rate of 5 per cent. During the last six months, our currency has depreciated and within last two months there was further depreciation of 10 per cent against the dollar. After the elections results, rupee has strengthened against the dollar, and it is expected that expatriate Pakistanis would respond to Imran Khan’s call to help salvage the economy.
Pakistan’s forex reserves today are $10 bn, and if the present trend of imports continues it is hardly enough for two months’ imports. Pakistan perhaps has no other choice but to approach IMF for the bail out. But on Wednesday the US cautioned the IMF against a possible fresh bailout for Pakistan’s new government to pay off Chinese lenders who have invested in the strategic China-Pakistan Economic Corridor. “Make no mistake, we will be watching what the IMF does,” US Secretary of State Mike Pompeo told CNBC in an interview. He was responding to a question on reports that Pakistan was drawing up a plan to seek a massive USD 12 billion bailout package from the IMF. Officials in Islamabad have accused Washington of using strong-arm tactics against Pakistan into scaling back billions of dollars’ worth of Chinese investment in their country’s infrastructure.
Pakistan has applied all administrative means, starting from introduction of cash margin requirements to imposition of heavy regulatory duties on imports and incentives to the exporters, but nothing so far has worked. Even a 15% devaluation of the rupee in two rounds last fiscal year could not arrest the rising trend of imports. Import bill for crude oil and petroleum products valued at $12.93 billion or 23 per cent of the total imports. This is understandable as Pakistan is dependent on the world for its requirements of petroleum products and crude oil. Import bill for machinery has a share of 19.3 per cent in total imports, which in dollar term means $10.5 bn. Power-generating machinery, electrical machinery and apparatus, telecom and textile machinery are, in that order, major items in this group. Of course, with completion of CPEC projects, this would come down substantially.
The third largest group is the agricultural and chemicals group with a share of 14.7 per cent or $ 9 bn. These are essential inputs for agricultural and industrial production such as fertilisers, insecticides, plastic materials, medicinal products, etc. Import bill for food items including pulses, milk and seeds for manufacturing vegetable oil is around $ 5 bn. It is expected that import of machinery for CPEC projects is not a regular phenomenon, and soon import bill for machinery would come down substantially. On the other hand, Pakistan should reduce the electricity and gas tariff, and take other measures to reduce the cost of inputs for industry so that it can compete in the international market. Since many raw materials used by industry are imported therefore rupee devaluation will increase the cost of inputs and make their products uncompetitive in world market.
Theoretically speaking, foreign country will not increase its purchases unless it can buy at least somewhat cheaper in terms of the foreign currency because a unit of foreign currency is worth more than expressed in the money of depreciating country. Anyhow, the incoming government has to decide whether it has other options rather than approaching the IMF. Renowned economist Dr Hafiz Pasha has said that new government will have to impose import quotas being the only way to reduce trade deficit since our capacity to boost exports in short term is limited. Meanwhile, China has committed to advance $2 bn, and there is possibility that Saudi Arabia would also come to Pakistan’s rescue. Incoming prime minister Imran is likely to give a call to Pakistani expatriates to increase remittances to help salvage the economy, and they are likely to respond favourably.
—The writer is a senior journalist based in Lahore.

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