Pakistan on the brink of Economic Catastrophe, Reserves decreasing by $1-bn every month


With the term of the Pakistan Muslim League-Nawaz (PML-N) government coming to an end, Pakistan is facing a huge economic crisis, which may lead the country to an economic catastrophe.

The political leadership— despite being aware of the escalating financial mess— is reluctant to take immediate corrective measures due to the looming general elections. Since corrective measures involve unpopular decision making, the political leadership is reluctant to follow the suite, fearing a public backlash may further push the already out of favour government into a further mess—bad for the general elections.

Former finance minister Senator Saleem Mandviwalla claimed net reserves with State Bank of Pakistan have reduced to $12.5 billion, insufficient to cover import bill of three months, while Finance Minister Ishaq Dar is engrossed in personnel cases at National Accountability Bureau (NAB).

Talking to Pakistan Today, Mandviwalla claimed that the finance ministry was keeping the nation in dark about the actual state of the economy. He said, “How can the ministry claim having enough reserves when there is already a deficit of $ 12 billion? Nobody from the ministry is ready to answer our queries about the financial situation at the Senate Standing Committee on Finance and Revenue. I know the government has no money to pay if private investors at the commercial banks demand their money back, as the government has spent all the deposits.” Mandviwalla further said the reserves are decreasing by $1 billion every month and it would be standing at $ 11.5 billion in November.

Pakistan Tehreek-e-Insaf (PTI) MNA Asad Umar told Pakistan Today, “Every government does the same; they are warned, but they don’t budge. Now bailout is the only option left—IMF”.

Expressing his opinion on government’s hesitancy to knock at International Monetary Fund’s (IMF) door, he said this was just political point scoring; sooner or later the government will have to ask IMF for help, but it would be too late then, as the country would have sunk deeper into the financial quagmire.

“I have been told that for the time being the government is going to the international bond market to seek more expensive debt,” he said, adding, “The country is sinking deeper into expensive debt as it has never obtained such a huge commercial debt which the PML-N government is doing now”.

He said the government has already taken Rs 4.5 billion short-term expensive debt and now it is eyeing Euro Bond and Sakook Market to seek more debts. So, on one hand, the quantum of borrowing is growing; on the other, the expensive average pricing is also increasing. He said the current fiscal policies of the government will leave it with no option but ask the International Financial Institutions (IFIs) for a bailout.

According to him, this year Pakistan’s financing gap would be $ 18 billion. Now picking $ 18 billion from the commercial market is almost impossible. Terming government’s policies as delaying the inevitable, he said even if the government obtains debt in this year, it can’t go for another borrowing next year, which means it will have to seek help from IMF.

The only way to avert such crisis [in future] is to “address the root cause which is that you [finance ministry] have an unsustainable gap between your inflows and outflows”.

No matter how many debts you obtain, at some point in time, it will have to be crisis management,” he said while referring to finance ministry, adding that the commercial lending would evaporate in the air and government would no longer be creditworthy and it would have to move to the IMF, which would dictate Pakistan’s policies as a result.

Replying to a query till what time Pakistan can drag the situation, Asad Umar said that at some point in time Pakistan would finally move towards the IMF, but there is no immediate threat of default.

“The government would be doing a disservice to Pakistan by not taking corrective measures. If they keep delaying the decision, the caretakers or next government would be forced to go for a bailout,” he concluded.

However, Saad Hashmi, head of research Topline Securities said, “We should rely on the reserves figure of $13.941.6 billion, which is definitely enough to cover three months’ import bill, as monthly import bill has been $ 3.8 billion to Rs 3.9 billion during the past few months.” Nevertheless, he added the government needed to go for a further foreign loan in near future, keeping in view the ballooning current account deficits. Despite the difficult situation of the economy, he said, the present debt to the GDP ratio is not worrisome.

According to former finance minister Hafeez Pasha’s recent article, the country is entering a period of great financial difficulties. During the four years of the current government, the total cumulative overall gross external borrowing is an unprecedented $42.6 billion, including $6.2 billion from the Extended Fund Facility of the IMF. Repayment of this loan has commenced in 2017-18. Net of debt repayment, the total net external borrowing by the incumbent government is $22.2 billion. During the first three years, it was used primarily to build foreign exchange reserves. External loans have been used totally to finance the current account deficit in 2016-17. In the absence of this borrowing, reserves would have fallen more precipitously as compared to the actual decline of $2 billion.

Reserves had started declining from October 2016 onwards. They were rapidly falling to a level below that required to provide import cover of at least three months. The ultimate litmus test of the sustainability of external debt is if the repayment of the outstanding debt can be financed without drawing on the foreign exchange reserves.

In addition to that, official data of the Finance Ministry show that country’s total liquid foreign exchange reserves witnessed a reduction of $3.95 billion from the peak level of $24 billion at end October 2016 to $20.05 billion by October 13, 2017. The State Bank of Pakistan’s (SBP) reserves are at $14 billion, sufficient to cover about 3 months of imports. However, the decline in the country’s FX reserves is primarily attributed to widening current account deficit.

It was further noted that the current account deficit widened to $12.4 billion during FY17 as compared to $4.9 billion in FY16. The trade deficit is one of the main reasons for such an increase in the deficit, owing to increase in imports of machinery, industrial raw material and petroleum products.

This sharp increase is due to increased investments under China-Pakistan Economic Corridor (CPEC) in energy and infrastructure sectors.

As imports increased, exports faced a stagnant trend due to the subdued demand, depressed commodity prices globally coupled with the energy shortages, political instability and law and order situation in the country.

There was also stagnancy in remittances due to tight budgetary conditions in GCC countries as a result of low oil prices, strict regulatory requirements in the US and depreciation of pound sterling against the US dollar.

Nevertheless, the government has managed to put a lid on the negative trend in exports, as exports have increased by 12.2 per cent and workers’ remittances by 1.0 per cent during July-September, 2017 as compared to same period of the last year.

Foreign Direct Investment (FDI), during the same period, stood at $663 million, showing an increase of 57 per cent over the corresponding period of last year. With these positive trends strengthening, in coming months the current account deficit will substantially improve in FY18.

Pakistan Today