Adding Dollars And Sense To Narratives On Pak Economy’s Fundamentals

IRSHAD SALIM (JUN 21, 2018): Three major concurring events over the past several months in a cause-and-effect relationship are simultaneously touching the economic fundamentals of the country: A) Sharp increase in import bills; B) Slowdown in overseas Pakistanis remittances; and C) Payback of loans and interest payments to IMF.

Pakistan relies heavily on imported fuel oil, which comes to almost one-fourth of annual imports; there has been insignificant increase in workers’ remittances; non-oil import bills have risen sharply while export revenue has not met the target — meanwhile,  mandatory external loans and interest payments to IMF, etc. began in March.

If we go by the international lender’s latest post-program monitoring report, the economy continues to deteriorate, even as private sector activity is gathering momentum, and the GDP growth rate has increased.

The previous government had expected the GDP growth rate to rise to 6 percent by the end of the fiscal year (June 30), while the Fund projects the same figure at 5.6 percent. It now hovers around 5.8% sans correction which some experts expect for the fiscal year ending on June 20.

The difference would highlight perception of the two institutions, on changes taking place in economic fundamentals of the country driven by external sector — the traditional Achilles heel of the country’s economy. It has been deteriorating since 2016 when the last Fund program ended.

As evident, foreign exchange reserves are falling fast, mainly on account of a growing trade deficit that the former government was struggling to contain through adhoc measures like the export relief package, regulatory duties and then with abrupt depreciation in the exchange rate which was artificially pegged to the dollar for more than three and a half years.

Reserves have now dropped to less than two months of import cover — it’s below critical levels and below the benchmark for sustainability, which is four months.

Net international reserves, the figure we get after deducting key short-term liabilities as well as money owed to the IMF from the gross foreign exchange reserves, has been negative since March. Back in 2016, when the last Fund program ended, the same figure stood positive — at $7.5 billion. This is a very large decline.

Common sense says that economic growth (GDP) bows to economic fundamentals, and not the other way round. However, we have been hearing otherwise.

Back in March, we had posed an obvious question regarding these two developments: GDP growth rate and falling foreign exchange reserves.

Which of these trumps the other?

Will the GDP growth and the attendant investments that lie behind it become some sort of auto-correcting mechanism, in due course driving up exports, boosting competitiveness and thereby arresting and reversing the growing current account deficit?

Or will the continuously declining foreign exchange reserves eventually force an abrupt correction in the form of a large devaluation, hike in interest rates and collapse of domestic demand, as happened in 2008?

Abrupt devaluation has taken place since last year — fourth in a row (third this year) and and a “large one” could be expected — Rs130 to Rs140 in months ahead — Mr. Zulqarnain, Pakistani entrepreneur and owner of Zultec in Saudi Arabia with business interests in both countries says he expects the Pak currency value to touch Rs150 a dollar, and remittances will reduce from the Middle East, he added.

Therefore, hike in interest rate is inevitable. The two would definitely affect consumer confidence and financial market stability, bank borrowings by private sector, etc.

In coming months, the more alarming part — growing challenges to arranging foreign loans — is expected. The economic managers had so far remained successful in contracting external borrowing that softened the impact of rising external imbalances on foreign exchange reserves.

The country needs an additional $5 billion to pay off its debt and make interest payments by the end of December. The emerging circular debt by borrowing from Peter to pay Paul is a matter of serious concern to independent economists and financial managers.

In a bid to shore up the reserves, caretaker Finance Minister Dr Shamshad Akhtar is seen mobilizing bankers and stockbrokers to make the tax amnesty scheme successful and the first dollar-based savings certificates for overseas Pakistanis — the idea of $1 billion bond was first floated by a group of Riyadh-based overseas Pakistanis back in December 2013 as alternate to calls for investing in Pakistan.

Fast forward, the former government announced a scheme toward the end of its rule, and estimated to receive $500 million to $1 billion in the next one year through the launch of dollar-based savings certificates for overseas Pakistanis — again, if majority of overseas Pakistanis (9.5 million estimated worldwide) feel confident about doing so.

Independent economists and individuals estimate that $1-4 billion could be added to the foreign currency reserves through the tax amnesty scheme if confidence level sustains over the months — specially through July and December.

Ms. Akhtar’s efforts, however, have in the meanwhile failed to stabilize the rupee-dollar parity as uncertainty prevails. Several experts including Pakistani expats in the financial sector we asked to comment on, say more devaluation is inevitable and imminent. Some key Pakistani entrepreneurs doing business in Saudi Arabia, UAE, USA and UK, and have investments in Pakistan, concur.

Some of them have invested in the country as foreign investors (taking advantage of holding dual nationality). It would mean lesser repatriation in dollars and depreciation of their retained earnings in Pakistan converted to dollar, they said.

Ironically, on April 21, 2018, former finance minister Miftah Ismail said: “I see good things happening right now and I do not see any further need of devaluation”. Since then 2 slides have occurred naturally to pacific the dynamics.

When asked to comment on the economic indicators, specially remittances and devaluation, the Editor & Publisher of Pakistan’s The Financial Daily English newspaper Mr. Manzar Naqvi, shared a sad emoticon on WhatsApp.

(The writer is a consultant and analyst, and Editor/Publisher of, and BE2C2 Report)

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