Farhat Ali
Warnings on the country’s state of economy continue to roll in. Earlier, concerns were voiced by the World Bank, IMF, ADB and supplemented by voices of warnings and concerns by leading economists of the country.
This week, a warning came from Fitch Ratings. Fitch Ratings’ announcement triggered panic in Pakistan Stock Exchange (PSX). Cumulatively, the index lost 1,653 points in the past four trading sessions. As much as Rs 232 billion was wiped off the Pakistan Stock Exchange market capitalisation. The figures published showed that mutual funds were the most aggressive sellers that dumped stocks worth $8.09 million. With a massive sum of Rs592 billion under management of which Rs 251 billion in equity funds, mutual funds could set the direction of the market. Offloading of risky assets by mutual funds was precipitated by the fear of possible redemption requests and an anxiety to save the ‘capital-protected funds’.
Alarmed by the economic meltdown, the Chief Justice of the country stepped in and addressed the economic challenges of the country.
Chief Justice Mian Saqib Nisar revealed this week that Pakistan did not have enough funds to cater for the imports of two months prior to the launch of the tax amnesty scheme. The situation therefore has improved to such an extent that the government has enough resources to pay salaries to its employees and pensions [of retired employees], he said while heading a two-member bench that had taken up a case pertaining to loan write-off.
However, the reality on ground is that the amnesty scheme’s results so far are far from government’s and experts’ expectations.
With nearly $6 billion worth of foreign assets – hardly 4% of the estimated wealth hidden abroad – have so far been declared under the offshore tax amnesty scheme, with Pakistanis repatriating a paltry sum of less than $30 million.
“Initial figures for the period of April 10 to June 30 show that Pakistanis have paid $290 million in taxes on nearly $6 billion of declared assets,” said sources in the State Bank of Pakistan.
They said the liquid assets that were transferred to Pakistan were around $30 million – even less than 1% of the conservative estimates of $3 billion.
Further, driven by media hype the Chief Justice volunteered to address the acute national water issue and observed that the funds generated through recovery from the loan defaulters would be utilised for construction of dams in the country. He had earlier announced the construction of two dams.
Up to now the decline in economic indicators like depreciation of rupee against dollar, the IMF loan impact and bank defaulters saga were of worry to the elite, opinion-makers and the state economists while the common man considered himself away from it. Not anymore. The dents in the state economy have now trickled down to the undistinguished commoner lacking class or rank distinction.
Inflation rate rose 5.2% in June, which was the highest level in the past 44 months as increase in the prices of petroleum products and sharp depreciation of the rupee begun to impact every household adversely.
Measured by the Consumer Price Index (CPI), the average increase in prices of 40 dozen items was calculated at 5.2%, reported the Pakistan Bureau of Statistics (PBS) on Wednesday. It was the highest level since October 2014 when inflation stood at 5.8%.
After that, it had started slowing down and at one stage dropped below 2%. However, the increase in prices of petroleum products and the weakening rupee since December 2017 fuelled inflationary pressures in the economy.
Many retail outlets that have pegged prices of daily-use commodities with the dollar have jacked up rates by 20%.
The timing to manage looming dangers is critical. The caretaker government is not inclined to act effectively and the new government is not likely to take charge before end September 2018. Economists expect that onwards from January 2019, debt service-related outflows will record a major surge. The next elected government will therefore have a window only between September to December to manage the situation which may necessitate more borrowing and ruthless economic reforms.
Whatsoever may have been the manifestos of political parties, one thing is absolutely clear that the next government will have to seek donors’ support. They, as a first option, are likely to seek financing of another billion dollars from the Chinese who have already lent a helping hand since the June budget to help shore up the foreign exchange.
The next feasible option will be to approach multilateral donors, especially the World Bank and ADB. However, both the institutions are now averse to lending purely for shoring up foreign exchange reserves. Both are inclined to provide loans that are dedicated to projects which are feasible and revenue-generation-oriented.
The possibility of a bond flotation, or raising foreign exchange through a swap, like the State Bank did in the summer of 2013 is likely to be complicated considering 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 [basis points] since issuance.
In order to manage timely loan repayment commitments, Pakistan will have to fall under the IMF programme. This has its own dynamics and restrictions not favourable to exposure to the CPEC, inflation in the country and growth rate but favourable in matters related to fiscal discipline, restructuring of loss-making public sector enterprises. Unfortunately, however, the PML-N government went on dragging its feet about these matters.
The options for the new government will be many if it’s a stable and a well meaning government.
Pakistan’s economic woes are quite simple; these not require an economic wizard to resolve them.
The prime issues are corruption, incompetence, inefficiency and lethargy. If the new government can manage to put good governance in place at a very short time, the nation possesses basic ingredients to turn around country’s economy. The recipe is straight forward and simple – increase revenue and cut expenditure, restructure or privatise the loss-making public sector enterprises, rationalize tariffs and cut losses in the energy sector, weed out the dead wood in state management and replace it with merit-based management, insulate the country against the burden of subsidies and transform it into a market-based economy, ensure greater participation of private sector in all economic and social initiatives.
(The writer the former President of Overseas Investors Chamber of Commerce and Industry)
