By Dr. Ashfaque H. Khan
Balance of Payments: An Update
The independent economists of the country have been expressing their serious concerns on the state of Pakistan’s economy in general and the balance of payments, in particular. Lately, the Deputy Governor of the country’s Central Bank (SBP), while defending his action for depreciating the currency, did air his concern on external balance of payments’ developments as well. The ones least bothered about these developments are the outgoing as well as the current regimes.
On May 27, 2017, I wrote an article, published in this newspaper (Business Recorder), under the title of “Ominous BoP Development”. I extensively reviewed the developments that had taken place on balance of payments, foreign exchange reserves and external debt and liabilities. Based on the developments, I presented the outlook for balance of payments, external debt etc. In just two months (June, July), things have deteriorated beyond my expectations. All my projections turned out to be highly conservative as opposed to realistic.
Exports are on the decline, and imports have surged on account of imports of petroleum, machinery, food and transport; while power generation machinery contributed negligibly. Accordingly, massive deterioration in trade balance took place in 2016-17. Stagnation in remittances and decline in the Coalition Support Fund (CSF) contributed to the rise of the current account deficit to a new height.
Even an ordinary student of economics could see the ominous developments taking place in Pakistan’s balance of payments. I and a few other economists could foresee these developments and have been writing to educate the people in general and the leadership in particular. But what is indeed surprising is that the IFIs, particularly the IMF, were totally oblivious to these developments. While the leadership and the government were busy at the Supreme Court and JIT, the country’s finance minister was presenting a rosy picture of the economy by extensively manipulating the numbers, the IMF – an otherwise highly professional institution kept its eyes and ears closed. Accordingly, this institution was equally a partner in portraying a false sense of economic stability and prosperity.
Did the IMF deliberately present a false sense of prosperity or has the quality of the IMF staff attached with Pakistani desk deteriorated massively? I leave it to the people of Pakistan to decide. This is a major concern for a developing country like Pakistan, which relies on the IMF’s policy advice. The new leadership of the Middle Eastern department of the IMF should review the quality of their staff and must take corrective measures. How can the IMF staff go so wrong in their forecasts, even for one quarter?
At the beginning of the fiscal year 2016-17, the IMF predicted a current account deficit of $4.7 billion; they predicted $9.0 billion at the end of May 2017 (Just one month before the close of the fiscal year). The year ended with $12.1 billion. The forecasting errors were 147 percent for one year and over 34 percent for just one month. Can anyone trust the forecast of the IMF staff? In the words of Dr. Hafiz Pasha, this speaks volume about the quality of the IMF staff.
Where do we stand at the end of the fiscal year 2016-17 as far as the balance of payments is concerned? Pakistan’s exports are down by 1.4 percent to $21.7 billion while imports surged by 17.7 percent at $48.5 billion. Consequently, the trade deficit stood at $26.9 billion in 2016-17. Interestingly, the trade deficit is more than Pakistan’s total exports by 24 percent. As a result of 3.0 percent decline in remittances and a sharp decline in Coalition Support Fund, the current account deficit widened to a nine years high at $12.1 billion.
Why has the external balance deteriorated so sharply? Firstly, exports are incessantly on the decline since 2013-14, declining from $25 billion to $21.7 billion. What has caused a steady decline in exports? Several factors have contributed to the decline in exports. These include: i) senseless taxation to achieve revenue target under the IMF Program, rendering Pakistan’s exports non-competitive in international market; ii) holding back refunds of exporters to show higher revenue growth created serious liquidity problem for the export-oriented industries. They were forced to borrow from commercial bank to maintain working capital and run their factories. This has added to their cost of production and eroded their external competitiveness; iii) the price of electricity, gas and POL products further eroded their relative competitiveness in international market; iv) little or no communication of the leadership with exporters to address their grievances; and finally v) keeping the exchange rate at a level which was not consistent with the country’s macroeconomic fundamentals.
In short, the type of policies pursued by the outgoing regime are responsible for eroding the competiveness of our exporters in international market. On import side, the persistence of overvalued exchange rate has encouraged imports. Furthermore, almost three-fourth contribution to the surge in imports came from petroleum, machinery, food and automobiles. The CPEC – related import of power generation machinery contributed negligibly to the surge in imports.
What is in store for the current fiscal year (2017-18)? In plain words, dangerous developments on balance of payments are emerging. Are we ready to handle the situation? The answer is a big no. Like the great recession of 2008, which changed the global economy for decades to come, the historic Supreme Court Judgment on Panama Case, has changed the politics of Pakistan for years to come. Pakistan’s politics has become dirty, scandalous and personalized. The government which has emerged after the judgment has given an impression that they are least interested in addressing Pakistan’s key challenges, not to mention the balance of payments. It appears that it is a combative government ready to fight with opposition and the key institutions. In such a situation, the country’s economy will further deteriorate and the balance of payments situation will aggravate as well.
The outgoing regime has presented a highly expansionary budget for the year 2017-18. If implemented in letter and spirit along with inappropriate exchange rate policy, this would further fuel aggregate demand which will be translated into further acceleration in import growth.
The prospects of increasing exports to the desired level is dim in 2017-18. Remittances stagnating at current level of $19 billion, with no prospects of the resumption of the CSF in near future, Pakistan’s current account deficit is likely to widen further to $16.0-16.5 billion. With $7.0-7.5 billion debt servicing, the financing requirement will jump to $23-24 billion in 2017-18. Likely availability of external financing from various traditional sources, Chinese sources, and FDI would at best be in the range of $12-12.5 billion. This leaves a financing gap of $10.5-11.5 billion in 2017-18. Who will fill this gap? We should ask the finance minister to answer this question.
Pakistan’s foreign exchange reserves stood at $16.1 billion as of end-June 2017. These reserves are borrowed reserves. It has come under pressure in 2016-17 as the country’s Central Bank has lost over $2 billion foreign exchange reserves in 2016-17. Is this the reserve held by the SBP in end-June 2017? The answer is No. In order to show a reserve of $16.1 billion as of end-June 2017, the SBP has borrowed $3.9 billion from commercial banks in forward market for one, two and three months. Pakistan’s foreign exchange reserves ($12 billion) will not be enough to fill the financing gap. Where Pakistan should be going to get additional external flows? The bottom line is that the outgoing regime has severely damaged the economy. It has made Pakistan highly vulnerable to external pressure by weakening the economy. Has this been done deliberately or it was sheer incompetence of the leadership? I leave it to the people to judge.
My plea to all those who matter in this country is that they should take my analysis seriously. There will be no stable government in the country until the new elections. The country will be ruled like a rudderless ship with no sense of direction. With a weak government and an equally weak economic team with hostile external environment, the country will be moving towards greater economic destabilization. May God save Pakistan?
(The author is Principal & Dean, School of Social Sciences and Humanities at NUST. Email: email@example.com )