A Lucky Break?

Spearhead Analysis – 17.08.2018

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

The Pakistan Tehreek-e-Insaaf (PTI) has all but formed the Government in the Centre, Punjab, and KPK. Imran Khan is certain to be voted in as the next Prime Minister on August 18, 2018. It is time that he starts acting like a Parliamentarian and a Prime Minister, as well. Two recent events exhibited his nonchalant attitude. On the day of the swearing in at the National assembly Imran Khan had to borrow a waistcoat from a National Assembly employee for having a picture taken for the ID card; and, on the day of the election for the new Speaker National Assembly he forgot to bring his computerized national identity card (CNIC), which is essential for voting. In another incident in Karachi, a PTI MPA beat up a citizen over a minor traffic incident. While these events might appear as being trivial, it is disturbing that the Government has not even started its tenure and a non-serious and non-caring mind-set appears to be emerging. Such events demand attention at a time when the country is facing serious challenges and the Man and the Party at the helm of affairs need to show resolve, maturity, and a departure from the policies of yore.

In January 2018 Fitch had placed Pakistan on a sovereign rating of ‘B’ on Negative Outlook based on concerns over the macroeconomic vulnerabilities in the economy. With depleting foreign exchange reserves and the widening current account deficit, the agency has now stated: “Further and considerable policy efforts would be required to stabilise the external position, and a new government has limited time to act ….. as external debt obligations will pick up more rapidly in 2019”. Fitch has made a downward revision in the FY19 growth estimate for Pakistan from 5.5 per cent to 5.0 per cent, reflecting the impact of expected tightening and austerity measures for addressing the external imbalances.

As a result of the rising deficit levels in the current account and trade account, with stagnant to falling remittances, rising imports, low level of exports and higher repatriations the government continues to be reliant on external borrowing. China has been offering loans to offset the fiscal imbalances, but the requirement for funding far exceeds what China is able and willing to provide. Additionally, while measures such as oil on deferred payment from Saudi Arabia and the Chinese funding might serve to provide temporary relief and help mitigate short term risks, but the cost of borrowing and the repayment pressure keeps on building. Unless constructive measures are adopted to increase the inflows, other than borrowing, Pakistan has limited options to reduce its economic risks.

Fitch has issued an ominous warning when it stated: “Pakistan’s cost of external market financing has risen in recent months, with yields on the government’s November 2017 10-year Eurobond up more than 200 bps since issuance. The cost could increase further amid continued global monetary tightening and rising geopolitical pressures. Vulnerabilities could be tested as rising debt-servicing payments start to add to external funding requirements from 2019.”

PTI faces the Herculean task of cleaning up the mess created by the past two governments, which has brought Pakistan to its current state of fiscal and economic distress. Pakistan needs funding and the new government needs to find it quickly. The country is on the Financial Action Task Force (FATF) Grey List and there is a high degree of probability that the new government would be forced to approach the International Monetary Fund (IMF) for yet another bailout with estimates ranging upwards to US$12 Billion in financing. With USA having expressed its reservations for funding for Pakistan it is going to be an uphill task to negotiate lenient terms for any potential funding.

While China has provided immediate relief with US$2 Billion in Loans and the Islamic Development Bank has put in place a US$4.5 Billion facility for oil import, there are far more drastic corrective measures that would need to be put in place to address the rising deficits. There will be belt tightening and it would hurt a lot of segments with rising costs and inflationary pressures building up. Plus, it should be factored in that any funding being provided would have strings attached for nothing comes without a cost. So far there has been limited clarity on the China Pakistan Economic Corridor (CPEC) funding and with further loans from China, it is imperative that the opaqueness surrounding the projects and the terms of funding be cleared up at the earliest.

Imran Khan in his speech after the elections referred to an Islamic Welfare State. He has plans to provide relief to the poor and the underprivileged. He also wants to build up the social infrastructure through improvement in Healthcare, Education, Employment, and Water and Sanitation. All these lofty ambitions require tremendous amounts of funding, something that at the moment is highly scarce. Stringent austerity measures would need to be put in place to cut the burden, and internal revenue generation greatly enhanced at the same time. A massive expansion in the tax net is required as opposed to milking the existing tax payers; the Exports need to double at a minimum as do the Remittances; and the Imports need to be severely curtailed. These are huge initiatives that would take an iron hand to implement and require time to yield the required results. For now, Pakistan needs funding to avert an immediate financial crisis and the IMF or ‘friendly’ countries appear to be the only sources. This would imply additional debt burden on top of what was contracted by the previous governments.

It is a vicious circle and to get out of it the PTI-led government would need to implement hard decisions, and explain to the Nation their plans and how these decisions would translate into a better future for Pakistan. The PTI leadership has made tall promises and berated the governments of the past on their flawed policies – it is now time to deliver, while facing an environment that is not of their making. In Chinese culture the Number 8 is considered the luckiest, it denotes “wealth”, “fortune”, and “prosperity”. Pakistan just celebrated 71 years of Independence (7 + 1 = 8) and one hopes that with a total of 8 this will now be the year that ushers in wealth, fortune and prosperity for Pakistan.