Economic mess for Pakistan's
government By Syed
Fazl-e-Haider
QUETTA, Pakistan - The new
elected government following the February 18
elections in Pakistan will be confronted by
serious economic challenges that include a
burgeoning current account deficit, stagnant
exports, rising inflation, a looming energy crisis
and social indicators that are amongst the worst
in Asia.
Pakistan's leading opposition
parties, which crushed President Pervez
Musharraf’s Pakistan Muslim League Quaid-e-Azam in
Monday's national elections, must now try to
cobble together a ruling coalition. That is
unlikely to be easy or quick, given decades of bad
blood between Pakistan Muslim League Nawaz, led by
former Prime Minister Nawaz Sharif, and its
longtime rival Pakistan People’s Party, which
together won enough seats to jointly form a simple
majority in Pakistan's parliament.
The
gravest immediate threat to the economy is the current
account deficit. Limiting the
ability of economic managers to prevent it
worsening is a declining inflow of investment from
abroad. Net foreign investment plunged US$1.02
billion, or 32%, to $2.17 billion during the first
six months of the current financial year, as
against $3.18 billion received during the same
period of the previous financial year.
The
growing current account deficit threatens to eat
up the country's foreign exchange reserves and
dampen GDP growth. Rising trade, services and
income deficits and interest payments on eurobonds
and other loans lie behind the country’s widening
gap in the current account. If the trend
continues, the current account deficit will be
more than $12 billion in the fiscal year ending on
June 2008.
According to Pakistan's central
bank, the current account deficit rose $1.46
billion, or 31.1%, to $6.14 billion during the
first six months of the current fiscal year, from
$4.70 billion in the previous corresponding
period. As the deficit looks set to climb past the
$12 billion mark in the full year it threatens to
undermine the country's ability to meet rising
payments for import of goods and services.
The services trade deficit widened 45% to
$2.8 billion in the first five months of the
fiscal year from $1.9 billion previously. Services
exports pulled in $1.09 billion in the July to
November period against $3.93 billion paid out for
the sector's imports, according to the State Bank
of Pakistan. Transportation contributed around 50%
of the overall services sector deficit.
Critics accuse the former government of
Prime Minister Shaukat Aziz of relying heavily on
undependable foreign exchange inflows such as
portfolio investment and remittances to cover the
current account and trade deficits. The trade
deficit in terms of GDP increased to 5.6% in the
2005 fiscal year from 2.4% in fiscal 2000 and the
trade gap continued to widen as expanding exports
failed to keep up with import growth. The former
government looked to finance the trade deficit
instead of developing a strategy to bridge the
gap. Analysts warn that if the widening trade gap
is not slowed or reversed, the country will again
fall into a trap where increased debt servicing
will hit development expenditure.
Cures
for the trade imbalance are unlikely to be
forthcoming in the short term, say some local
experts. An energy crisis will limit exports just
as imports are expected to surge, with the
government being forced to import wheat - amid
steeply rising global prices for the commodity -
to help the country meet local shortages. Higher
prices for food and oil are hurting workers while
exports are unlikely to show much growth in any
case as they battle against international
competition.
International financial
institutions have expressed concern over
Pakistan’s increasing current account deficit. The
World Bank in its latest report said: "Current
account positions worsened in a number of
countries over the course of 2007, with deficits
reaching close to 5% of GDP in Pakistan and about
2% in India." The IMF has predicted that the
external current account deficit will increase
with recent gains in oil prices, which is
affecting current account deficits in a number of
countries.
According to the Merrill Lynch,
the oil import bill and current account deficit is
expected to rise by another $1.4 billion, if
average oil price assumption is raised to $75
billion barrels (bbl) for the full 2007-08
financial year. Pointing at a possible current
account deficit of $7.7 billion in 2007-08, the
Merrill Lynch has calculated that every 10% rise
in oil prices will add $700 million to the import
bill and the current account deficit.
Foreign investment has been estimated at
$5.1 billion for 2007-08, compared with $8.4
billion in 2006-07, leaving the remaining $4
billion or so of current account deficit to be
funded through a mix of reserve withdrawals and
external debt.
Meanwhile Merrill believes
the risk of a pronounced second round of inflation
is very much on the cards, given the significant
recent rises rates of food and oil price gains.
Global wheat prices have more than doubled since
May, and prices of the grain have risen more than
20% since November in Pakistan, the world's
sixth-largest consumer of the dietary staple. That
helped Pakistan's inflation rate to accelerate the
most in 33 months in January, with consumer prices
rising 11.8% from a year earlier after they rose
8.8% in December, the Federal Bureau of Statistics
said this month.
Government
borrowing The increasing current account
deficit compelled the government to make fresh
borrowings from internal and external sources.
Foreign debt and liabilities increased by about
6%, or $2.4 billion, to $42.88 billion during
July-December from the same period a year earlier,
according to the State Bank of Pakistan.
During the period, government borrowing
from the schedule banks and the central bank for
budgetary support increased 248% to pass 1
trillion rupees. This is likely to further
increase inflationary pressure on the economy. Net
government borrowing from the banking system rose
to 243.942 billion rupees from July 2007 to
January 6, 2008, against 63.497 billion rupees
during the previous corresponding period,
according to central bank data. The main reasons
for huge budgetary borrowing have been identified
as rising government expenditure and subsidies on
commodities.
Poor export
performance Pakistan is likely to miss its
export target of $19.2 billion set for the year
2007-08 due to the prevailing energy crisis and
political turmoil. Imports, notably food and
food-related items, could grow further and
intensify inflationary pressure. The country’s
total exports during the first half of the current
fiscal year (July-December, 2007) stood at $8.72
billion against total imports of $16.95 billion,
indicating a $8.24 billion deficit, up 27%
compared with $6.49 billion in the same period of
the previous fiscal year.
Sluggish exports
and inflation have helped to worsen the current
account deficit. In December alone, the trade
deficit was $1.02 billion, on $2.35 billion in
imports against $1.33 billion of exports, which
were down 13.6% from the same period a year
earlier. Even a 1.11% depreciation of the
Pakistani rupee against the US dollar in the month
could not strengthen the country’s exports, as
trading was severely disrupted in the last four
days of 2007 following the assassination of former
Prime Minister Benazir Bhutto on December 27. This
caused a 12% decline export proceeds, cutting the
trade balance by 2.98% during the month.
The poor export performance of textile
products during the current financial year brought
down the share of textiles in total exports to 61%
from over 65%. Textile exports remained flat at
$4.49 billion in first five months of the current
fiscal year, compared with over $4.51 billion in
the previous similar period. The country is likely
to miss the textile export target of $12.21
billion set for the current fiscal year.
Pakistan’s central bank tried under the
modified Export Finance Scheme to improve the
availability of working capital facilities to
exporters, in particular offering exporters in the
value-added textile sector loan facilities at 7.5%
per annum, as against the prevailing market rate
of 12% to 20%. Even so, exporters have so far
failed to boost earnings since the beginning of
the current fiscal year; meanwhile export
refinancing has grown at a faster rate than export
earnings due to gross misuse of the export finance
scheme.
Textile exports declined
continuously from July 2007, when they stood at
$952 million, to $938 million a month later, $922
million in September and $837 million in October.
Banks increased lending to the textile sector by
about 17% to 83.4 billion rupees in the first
quarter (July-September) of the current fiscal
year, compared with 71.5 billion rupees in the
previous similar period.
Rising oil prices
present a continual threat to the economy of
Pakistan, which is heavily dependent on oil
imports, with fuel imports representing more than
30% of merchandise imports. The country’s widening
trade gap is attributed to the recent record rise
in oil prices and no substantial increase in major
exportable items like textile products during
current fiscal year. Pakistan’s central bank
considers the decrease in export growth and the
rise in cost of financing for funding the external
deficit as potential risks to Pakistan economy.
Syed Fazl-e-Haider,
sfazlehaider05@yahoo.com, is a Quetta-based
development analyst. He is the author of six
books, including The Economic Development of
Balochistan, published in May 2004
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