Macroeconomics Factors
that need attention Pakistan
Introduction
Over the past 50 years,
Pakistan’s record on macroeconomic management has been mixed. In the face of a
variety of internal and external shocks, the country has managed to avoid
excessive macroeconomic instability in the form of hyperinflation or severe
exchange rate volatility. While its internal and external public debt has grown
as a share of gross domestic product (GDP), and is now approaching levels that
warrant attention, Pakistan has so far managed this growth without resorting to
sovereign defaults, which leave a long shadow on a country’s ability to access
capital markets. Finally, Pakistan has also avoided the kind of large-scale
banking crises that many other developing countries have experienced with
lasting impact on credit availability and private sector development.
Alongside these positive
features, however, Pakistan has demonstrated an almost unique proclivity to
allow fiscal and balance of payments pressures to build up into a near-crisis
situation every few years, which then must be dealt with through orthodox
economic stabilization tools, often with the help of the International Monetary
Fund (IMF). In general, these stresses have been contained before they could
become a full-blown economic crisis, but the cumulative cost of these periodic
crisis-aversion programs has been to slow down economic and social development,
resulting in the mediocre—and in some cases, poor—comparative development
indicators that we see today. And, because each episode was addressed with
short-term actions that stabilized the economy without adequate follow-through
on structural reforms, the underlying weaknesses simply manifested themselves
again with the next external shock or period of internal economic
mismanagement. Moreover, this preoccupation with managing short-term
macroeconomic vulnerabilities has limited the attention that top policymakers
can devote to more fundamental issues of economic development and structural
transformation.
Over View
GDP continued to grow above 5 percent in
each of the last 2 years reaching 5.79 percent highest in 13 years in the
outgoing fiscal year FY2018 and 4 percent in each of the three preceding years.
The most important achievements of the outgoing fiscal year include the fastest
pace in real GDP growth on the back of strong growth in agriculture, impressive
growth in manufacturing as well as in services.
Apart from these positive developments,
risks/challenges remain on domestic and external fronts, particularly the
unfavorable BOP position due to a widening Current Account Deficit (CAD) along
with less than expected foreign inflows and a decline in exports in the last
two to three years. Slow global growth in international trade flows was an
external factor that contributed to the low export growth
The provisional information presents a
mixed picture of Pakistan’s economy at the end of Q3-FY18. Maintaining its upward trajectory, the real
GDP growth is estimated at a 13-year high of 5.8 percent in FY18, along with a
benign inflationary environment. However, deterioration in external balances and high
fiscal deficit remains a
major
source of concern.
The estimates for FY18 also suggest that
compared to FY17 all the three sectors remained vibrant In the same encouraging vein, inflation
remained within manageable and supportive levels, largely owing to decline in
its food component.
The second impact relates to
increased consumption,
which along with
recovering
oil prices, further inflated the import payments.
Higher import bill, despite 10
consecutive months of
exports growth and
rising workers’ remittances, resulted in
record widening of
current account deficit. Even
higher financial inflows from IFIs,
bilateral sources, and issuance
of
sovereign bonds
remained insufficient.
Thus,
the remaining payment gap fell on
the country’s FX reserves,
which fell to
only two months of import cover by end-March, 2018. The foreign exchange
market also remained volatile
and PKR depreciated
by 9.2 percent against the US$
during Jul-Mar
period of FY18.
These external sector
developments started to impact inflation as
well. The pass- through
of rising global oil prices to domestic fuel prices pushed
up the energy component of inflation, as
the government passed
on its impact to consumers.
Similarly, the impact of PKR depreciation
started to translate into costly imports and shoring up of inflationary expectations.
On the fiscal side, the healthy growth
in revenue could not keep up
pace with a sharp rise in fiscal expenditure in the
Q3-FY18. Particularly, the development expenditure related to infrastructure and
power projects
increased sharply,
with major contribution coming from provinces. As
a result, the fiscal deficit in Q3- FY18
stood
higher than corresponding
period last year.
To finance the fiscal gap, the government had
to
rely both on SBP’s
borrowing and external sources. In particular, the government borrowings
from
SBP stood at
Rs2.2 trillion in
Q3-FY18
– the highest level in
a quarter.
External debt, owing
both to higher commercial loans and
revaluation impact of the PKR depreciation,
also
rose considerably.
In
short, ensuring the continuity
of expansion in economic
activities
and low inflation would depend
on containing of current account and fiscal deficits.
As these
vulnerabilities are posing challenges to Pakistan’s current growth cycle, implementation
of both short-term and
medium term policies would
be crucial in
this regard.
In
short-term, concerted
efforts could
be made
to rationalize
fiscal expenditures
given
the
tax relief measures
approved in budget FY19.
In the medium term reforms would be
needed to expand tax base besides enhancing efficiency of the existing system.
Simultaneously,
there is a
need to arrange external financing in
the short term. Also, more policy measures are required to contain the
widening
trade deficit. For
this purpose, it is
also
crucial to resolve
structural issues
affecting exports competiveness.
Pakistan’s
growth continues to accelerate but macroeconomic imbalances are widening.
Macroeconomic stability is a major concern for the near-term economic outlook.
Pakistan’s GDP growth increased by 0.8 percentage points over the previous year
to reach 5.8 percent in FY18. Major impetus came from improved performance of
services and agriculture sector. Industrial sector also saw some recovery. Low
interest rate environment contributed to the growth in private sector credit,
which supported businesses. On the demand side, private consumption made up
almost 86 percent of GDP. Average headline inflation in FY18 remained contained
at 3.8 percent compared to 4.2 percent in FY17, well below the central bank’s
target of 6 percent for FY18. Inflation has been inching up and core inflation
rose sharply in Q4 FY18 as a result of depreciation and demand-side pressures.
The balance
of payments is under stress due to relatively high current account deficit
(CAD) at 5.8 percent of GDP (US$18.1 billion) in FY18. Exports, after
contracting for three consecutive fiscal years, grew by 12.6 percent in FY18,
but relatively stronger import growth (14.7 percent) has resulted in a higher
trade deficit. Government imposed regulatory duties on a large number of
imports to slowdown import growth and the exchange rate has depreciated by a
cumulative 18 percent in FY18. The policy interest rate was raised by 175 bps
during the second half of FY18 to ease demand pressures. Despite this, official
international reserves have declined to US$9.6 billion by early September 2018
(1.6 months of imports), compared to US$16.1 billion at end-June 2017. To
support declining reserves, government has been tapping international markets
issuing bonds and commercial and official loans.
The fiscal
deficit further deteriorated in FY18 to 6.6 percent of GDP in the run up to the
elections, 2.5 percentage points higher than the target set at the beginning of
the FY. The main reasons for the fiscal slippage were a large increase in
recurrent spending together with low revenue growth (non-tax revenues). Tax
revenues of Federal Board of Revenue (FBR) during grew by 14.3 percent to
PKR3,842 billion in FY18.
.
Pakistani rupee has been devaluing since December 2017 and has
lost almost 3.7pc of its value as of now. In December, the value of rupee per
US dollar was almost 105 but it observed a steep rise reaching 119.84 in June
2018. This was a great shock to the macroeconomic situation as it gave rise to
many more problems our economy is currently facing. According to data combined
by Bloomberg, the Pakistani rupee was Asia’s worst-performing currency this
year. Some analysts expect the currency to drop further. Standard Chartered PLC
predicts that the rupee will fall to 125 per dollar by the end of the year and
International Monetary Fund may request authorities to weaken it even further.
Pakistan’s external debt
is expected to climb up to 103 billion dollars by June 2019. Pakistan’s
public debt would remain higher than the limit prescribed in the revised Fiscal
Responsibility and Debt Limitation Act . The country requires paying $12
billion in first half of 2018 as per its liabilities. Gross fiscal
financing needs will likely exceed 30pc of GDP from 2018-19 onwards, in part
reflecting increased debt service obligations. All this has led to growing
challenges to arrange foreign loans. The IMF also said that “While the level of
external debt has remained moderate, continued mobilization of external
financing at favorable rates could become more challenging in the period ahead
against the background of rising international interest rates and increasing
financing needs
MAJOR MACRO ECONOMIC INDICATORS
Main Economic Indicators
|
2015
|
2016
|
2017(f)
|
2018(f)
|
GDP growth (%)
|
4.5
|
5.3
|
5.8
|
5.0
|
Inflation (yearly average, %)
|
2.9
|
4.1
|
4,1
|
4.0
|
Budget balance (% GDP)*
|
-4.6
|
-5.8
|
-6.5
|
-6.0
|
Current account balance (% GDP)
|
-1.7
|
-4.1
|
-5.5
|
-4,0
|
Public debt (% GDP)
|
67.7
|
67.0
|
73.0
|
72.0
|
·
New IMP Program
The
next crisis is now approaching. After successfully containing macroeconomic
imbalances under an IMF-supported program during 2013–16, irresponsible fiscal
expansion has led to a large and unsustainable balance of payments imbalance, a
steep decline in foreign exchange reserves, and a sharp buildup of external
debt, some of it on short maturities and expensive terms. Most economists agree
that the government will have no
alternative but to approach the IMF yet again for another bailout with
associated policy conditionality, such a request has indeed been made.
Income and expenditure of the public sector
There has been a chronic
imbalance between the income and expenditure of the public sector. This is not
because Pakistan’s public budget is much larger, in relative terms, than that
of other emerging markets. Rather, it is because the government’s income from
taxes, fees, and other sources is strikingly low compared with other countries.
This
is not to say that there is no waste in public spending, or that it could not
be better allocated. There are well-documented studies that show how both
current and capital spending by the federal and provincial governments and
their associated bodies could be dramatically improved to get “more bang for
the buck.” Similarly, the persistent losses made by some public sector
enterprises,[1] and
the even larger losses made in the energy sector,[2] provide
additional scope for improving public finances. The case is all the more
compelling given the comparatively low level of public spending on health and
education, which explains, at least in part, why Pakistan lags woefully behind
on social indicators of development. Finally, inadequate public investment in
infrastructure constrains the potential for sustained high growth. There is, therefore,
a clear need to rationalize and improve the effectiveness of public
expenditure.
However,
it is on the revenue side that Pakistan is among the weakest performing
countries in the developing world. Despite 40 years of efforts to improve both
tax policy and tax administration, the ratio of taxes to GDP remains stuck in
the low teens, below the middle-income countries (MICs) average of around 18.5
percent.[3] In
addition, the tax system is complicated, distorting, and not sufficiently
progressive.
Two features of the tax
structure are worth noting in particular: the high proportion of taxes
collected through indirect taxes (60 percent of total tax revenue) and the
small number of individuals who file income tax returns. Indirect
taxes—essentially excise taxes, import duties, and fees of various sorts—are
generally more regressive than direct taxes; in other words, their burden falls
disproportionately on the poor and less well-off households. A further problem
is that the second-best system of withholding and presumptive taxes has grown
very complex, adding to the negative perceptions of the overall tax system.
Attempts to introduce a VAT, a more efficient indirect tax, have failed in the
face of political opposition.
The
low number of income tax filers (just over one million out of an estimated
working population of 116 million[4]),
and the prevalent underreporting of income by those who do file, has important
consequences. First, it limits total tax revenue for the government. Indeed, it
is hard to envisage how the tax to GDP ratio could be increased by 50 percent
(to reach the norm for developing countries) without a substantial increase in
the number of filers in the tax net.
Second, tax avoidance or
under payment undermines public confidence in the fairness of the tax system.
The perception (and reality) that people who are known to have very high
incomes pay little or no income tax fosters a sense that the system is rigged
to protect the rich and powerful. The annual publication of tax payments by
parliamentarians, demonstrating in many cases a clear disconnect between their
declared tax payments and their visible standard of living has been a great
advance in transparency, but, so far, it has not altered the underlying pattern
of behavior.
Those who claim to derive
their income from agriculture (on which no income taxes are paid), and those
engaged in trading or professional services who are either unregistered as
taxpayers or pay small amounts in relation to their perceived incomes, are also
often viewed as benefiting from an inequitable system. Property is mostly
undervalued for tax purposes, so the revenue from this potentially important
source is also very low by international comparison.
Tax
avoidance is also found in the corporate sector. Of the 72,500 firms registered
with the Security and Exchange Commission of Pakistan in 2016, less than half
filed a tax return and half of the filers had a “zero return.”[5]
Many studies have
considered the problems of tax policy and tax administration. On the policy
side, the recommendations range from proposals to address specific anomalies or
missed opportunities all the way to plans for a complete revamp, with a new
simplified and efficient approach to setting up a tax system. Similarly, there
are incremental as well as radical proposals to reform tax administration,
which is generally seen as inefficient and plagued by corruption. There have
also been a variety of projects over the years, many supported by international
agencies with technical assistance and policy conditionality, to promote these
recommendations.
Why have past programs
failed to generate a substantial and lasting improvement in Pakistan’s tax outcomes?
Many blame corruption and incompetence in the tax administration, and this is
certainly part of the explanation. Others point to the large share of the
informal sector in Pakistan’s economy, which makes it harder to track
individual and small business incomes. Yet others will point to the fact that a
large share of the working population would fall below any reasonable income
threshold for paying taxes. Finally, there is the problem of lack of trust in
the quality and integrity of government spending. Many observers point to the
generous levels of private charity by people who pay little in taxes as
demonstrating that people are willing to contribute to the larger social good
if they are confident that the money will be put to good use. These observers
maintain that lower levels of tax avoidance would naturally follow a
demonstrated improvement in the coherence and effectiveness of government
spending. All these points have some truth to them, but they also apply to
other countries that have, nevertheless, succeeded in enrolling much larger
numbers of their working population into the tax net.
The larger and more
important explanation for Pakistan’s failure to improve its tax outcomes, in my
view, is one of political economy. Pakistan simply lacks a powerful enough
coalition of interests to raise more taxes and to push for real improvements in
the quality of government spending. Normally, this would come from a
combination of those in government who want to spend money without raising the
deficit and private taxpayers who are increasingly resentful of the high tax
rates they pay while their peers remain outside the tax net. While both groups
exist in the country, they have not been able to come together and overcome the
powerful interests on the other side.
In particular,
governments have often backtracked on their efforts to widen the tax net when
faced with opposition from their political constituencies or linked interests.
As a result, in times of fiscal stress, it has proved easier to cut back on the
already low level of public investment spending, with damaging—but
lagged—consequences. Many donor agencies and international partners—including
the World Bank, the IMF, and bilateral aid agencies—have tried to influence
this process through a combination of carrots and sticks, but they too have not
succeeded.
Until Pakistan can
substantially raise tax revenue by broadening the base of direct taxpayers, it
will remain constrained in its ability to expand the delivery of much-needed
public services and infrastructure without building up unsustainable fiscal
deficits. And without that extra infrastructure and improved human development,
growth will remain elusive and the country’s place in an ever more competitive
world economy will remain fragile. What events or forces will bring about the
political consensus to overcome longstanding constraints in this regard remains
a subject of discussion.
FOREX
Pakistan has seen foreign reserves dwindle
to about $9 billion; barely enough to meet its external debt through the end of
the year, and the rupee has lost more than 20 percent of its value since
December. Pakistan still plans to seek a bailout from the International
Monetary Fund (IMF) despite Saudi Arabia agreeing to offer a $6 billion rescue
package, Pakistan's finance ministry said on Wednesday. Pakistan’s balance of
payments remained under stress due to rising imports of capital equipment and
fuel during July-March FY2018. Recovery in global oil prices also played a role
in pushing up the import bill. The remarkable growth in exports earnings and
remittances inflows was not sufficient to overcome the current account deficit
gap. The SBP’s liquid foreign exchange reserves declined by US $ 4.5 billion
during July-March FY2018.
Pakistan’s current account deficit
contracted by 9.2 percent on month on month basis in March 2018 and reached to
US $ 1.16 billion as compared to US $ 1.28 billion in February 2018. However,
the current account deficit widened by 50.5 percent and reached to US$ 12.03
billion (3.8 percent of GDP) during July- March FY2018. This was mainly due to 20.7 percent widening
in the trade deficit, amounted US$ 22.3 billion. The widening of trade deficit
is mainly due to surge in import bill by 16.6 percent and
reached to US
$ 40.6 billion overshadowed the increased in
exports and workers’ remittances. The remittances registered a significant
growth of 3.6 percent during July-March FY 2018 against the decline of 2.0
percent last year
During the last few years, Pakistan exports
were not picking up and recorded a negative growth. The main reasons for
declining of exports were global slowdown but now the global economy is on the
track of recovery. Pakistan exports are also on the increasing and the negative
effect started bottoming out.
Exports during July-March FY2018 reached to
US$ 17.1 billion as compared to US$ 15.1 billion in July- March FY2017,
registered a growth of 13.1 percent. Pakistan imports were up by 15.7 percent
in the first nine months of the current fiscal year, rising from $ 38,369
million during FY2017 (July- March) to 44,379 million, showing an increase of $
6010 million in absolute term. To slow down the imports, an additional
regulatory duty was imposed to curtail the inflated imports.
Pakistan’s balance of payments remained
under stress due to rising imports of capital equipment and fuel during
July-March FY2018. Recovery in global oil prices also played a role in pushing
up the import bill. The remarkable growth in exports earnings and remittances
inflows was not sufficient to overcome the current account deficit gap. The
SBP’s liquid foreign exchange reserves declined by US $ 4.5 billion during
July-March FY2018. ,
The main source of macroeconomic vulnerability for
Pakistan has been its external sector. Most successful emerging markets
followed a strategy of promoting both the quantity and quality of their
exports. Starting from low export levels comprised mainly of relatively
unprocessed commodities or low value-added manufactures, these countries have
dramatically expanded the volume, diversity, and sophistication of their
exports.
In contrast, exports have
remained a much smaller share of Pakistan’s economy since independence. And
over the past three years, a combination of factors—security and energy supply
problems, lower commodity prices, and an appreciating real exchange rate—have
brought exports down to well below 10 percent of GDP. exports
from Pakistan would have to more than triple from their current level to match
the average for MICs. Pakistan’s exports have also been remarkably concentrated
in a few low value-added products. Cotton and cotton products, rice, and
leather still account for over 70 percent of the country’s exports, and the
bulk of exports in each of these categories is in primary or little processed
form. Service exports, which have been a rapidly growing source of high
value-added export revenue in many countries, remain a small fraction of
Pakistan’s exports.
Given its low level of
exports, Pakistan has relied in recent years on a large and growing volume of
remittances and on official and private financing to cover its import bill. It
is worth noting, however, that these international flows, especially private
flows, can be volatile because they are subject to external and internal
shocks. Pakistan has had a consistent rising trend of remittance flows for many
years, but recent international economic developments suggest that this is
unlikely to persist. Remittances from the Gulf countries, which have been a
large and growing share of the total, are likely to plateau as these countries
adjust their spending to the new lower price of oil. Pakistan will need to
adjust to lower growth in remittances going forward.
In good years, these
international inflows have been sufficient not only to meet the demands for
foreign exchange—even with an appreciating real exchange rate—but also to lead
to an increase in the country’s foreign exchange reserves. However, when there
was an external shock—such as the increase in oil prices in the years leading
up to 2014—or when an excessively loose fiscal stance or a misguided exchange
rate policy translated into an increased demand for foreign exchange, as has
been the case more recently, these reserves were drawn down, sometimes to a
level that threatened a macroeconomic crisis and led to recourse to the IMF
(figure 1). At the time of writing, after a few years of being on a positive
trajectory, these reserves were again on a downward trend and hovering around
$10 billion, below the three months of imports mark that is used by many
institutions as a minimum for certain kinds of financial operations.
Growth
Pakistan has seen a visible economic
turnaround over the last five years,
due to successful implementation
of a comprehensive program of economic revival aimed at higher economic growth
and macro-economic stability. The growth momentum remained above 5 percent for
the last two years in a row and reached 5.79 percent in FY2018 which is 13
years high on However, the balance of payments issues, sharp decrease o the
Dollar Rupee parity rate and the resulting inflation has promoted various
agencies to revise the growth rate for the next two years to around 4%,
Growth and Investment
Pakistan has seen a visible economic
turnaround over the last five
years, due to successful implementation of a
comprehensive n the same period last
year. Credit demand for fixed investment contained to 12.03 billion (3.8
percent of GDP) during July- March FY2018.
This was mainly due to 20.7 percent widening in the trade deficit,
amounted US$ 22.3 billion. The widening of trade deficit is mainly due to surge
in import bill by 16.6 reached to US$ 14.6 billion during first nine month of
current year as compared to US$ 14.4 billion during the same period last year.
The trend will continue
Increase in external debt contributed Rs
830 billion to the public debt, while, government borrowing for financing
fiscal deficit from external sources was Rs 384 billion. Therefore, the
increase in external debt signifies both borrowings for financing fiscal
deficit as well as revaluation losses due to Pak Rupee depreciation against US
Dollar as well as appreciation of other currencies against US Dollar.
Pakistan's public debt dynamics witnessed various positive developments in the
ongoing fiscal year,
Consumption is the largest component of
aggregate demand followed by investment and net exports. During FY 2018,
households' average propensity to consume remained fairly constant at around
85.5 percent at constant prices and around 82.0 percent in current prices
Contained inflation helped increase in
consumption by private and General Government. During July-March FY 2018,
current account deficit remained US $ 12.0 billion and is expected that it will
cross US $15.0 billion at the
end of current fiscal
year.
The national savings and domestic savings
as percentage of GDP remained almost at same level of last year. National
income remained less than expenditures during FY 2018 when compared with FY
2017 which resulted increase in Saving-Investment gap.
The increase in Saving-Investment gap in turn resulted in higher
current-account deficit.
Gross Fixed Capital Formation (GFCF),
considered as fixed investment stood at Rs 5,099.1 billion in FY 2018 compared
to Rs 4,632.8 billion last year
posting a growth
of 10.1 percent. The private sector GFCF posted a growth 5.2 percent as
it increased to Rs 3,371.2 billion compared to 3,205.5 billion last year while
the public sector GFCF increased to Rs 373.3 billion compared to 339.5 billion
last year showing a growth of 9.9 percent. The expenditure on GFCF incurred by
federal, provincial and district governments has increased by 23.9 percent,
22.1 percent and 45.7 percent, respectively. During FY 2018, per capita income
increased by 0.5 percent over last year to $1641.
FDI (China and Saudi)
China
China has made
agreements with Pakistan under the CPEC umbrella. The
Chinese have come forward with a planned investment of $35 billion or 70 per
cent of the total CPEC allocation under the IPP policy, under this funding has been made for coal power plants,
hydropower plants, some of these projects have been commissioned . The
remaining 15$ is earmarked for construction of roads and railways. This plan is a national
plan approved by both Chinese and Pakistani governments. This plan is effective until 2030, the short-term projects
included will be considered up to 2020; medium-term projects up to 2025; and long-term projects
up to 2030.Node
cities that the corridor
passes through include Kashgar, Atushi, Tumshuq,
Shule, Shufu, Akto, Tashkurgan Tajik, Gilgit,
Peshawar, Dera Ismail Khan, Islamabad,
Lahore, Multan, Quetta, Sukkur, Hyderabad, Karachi and Gwadar.
The Chinese and Pakistani governments are
the advocator, planner and guider of the CPEC project. Considering the Chinese
and Pakistani economic systems, commercial projects related to the CPEC should
be operated in a market-oriented way; quasi-commercial major infrastructure
projects could adopt the public private partnership mode; and non- commercial
projects concerning people's livelihood should involve multiple participants
and be implemented through fair competition.
Transport infrastructure is the basic and
prerequisite condition for the construction of the CPEC. Construction and
development of Kashgar-Islamabad, Peshawar-Islamabad- Karachi, Sukkur-Gwadar
Port and Dera Ismail Khan-Quetta-Sohrab-Gwadar road infrastructure, to enhance
road safety and service levels and expand traffic capacity.
Capacity expansion of existing railway lines (specifically ML-1 that is of
strategic nature under CPEC), and construction of new projects
and
promoting the modernization of the railway and build an integrated transport
corridor.
Construction and development of Gwadar city
and port; build a consolidation and distribution transport system, continuously
improve the infrastructure of the port, accelerate the construction of East Bay
the construction of cross-border optical fibre
cables between China and Pakistan and the construction of the backbone optical
fiber networks in Pakistan. Upgrading of Pakistan's network facilities, including the national data center and the second
submarine cable landing
station.
Saudi Arabia
has offered three facilities.
These are:
1.
Setting up of a refinery at Gwadar : Pakistan
wants to build an oil refinery near the deep-water port of Gwadar to reduce
petroleum product imports Saudi
Arabia agreed in principle to set up a
major refinery at Gwadar and showed serious commitment to make investments in
other areas of energy sector 8B $ is the reported cost of the proposed
refinery. Agreements on Reko Diq gold,
copper mines and Gwadar oil refinery likely to be signed next week
2. Saudi Arabia has agreed to loan Pakistan $3
billion for one year as balance of payment support and to provide a one-year
deferred payment facility for oil payments, up to $3 billion.
3. Saudis have also offered 3 $B one year deferred payment oil
import facility.
Pakistan’s debt and
liabilities rose sharply to nearly Rs30 trillion or 87% of total size of the
economy at the end of previous fiscal year, largely due to the last
government’s expansionary fiscal policies and its failure to reform tax
administration.
Of the Rs29.9 trillion,
gross public debt, which is the direct responsibility of the government, stood
at Rs25 trillion. It was equal to 72.5% of gross domestic product (GDP), far
higher than the statutory limit of 60%, showed the statistics. The gross public
debt grew Rs10.6 trillion or 74.5% in the past five years.
The main reason for the
increase in the gross public debt was the PML-N government’s failure to contain
expenditures and enhance tax-to-GDP ratio to a level that could have sustained
the burden of additional expenditures.
Interest payments on debt,
which stood at Rs996 billion five years ago, increased to Rs1.6 trillion at the
end of last fiscal year. The government paid Rs1.33 trillion in interest
payments on domestic debt and Rs172.4 billion on external debt, which is quite
a high figure.
Pakistan’s total debt and liabilities have pushed
up sharply and touched at Rs29.861 trillion or 86.8 percent of GDP till June
30, 2018 The external debt and liabilities (EDL) peaked to $95.097
billion on June 30, 2018, posing a serious threat for the country on repayment
of its foreign obligations. The external debt servicing consumed $7.479 billion
in last fiscal year 2017-18 including principle amount of $5.186 billion and
interest payment of $2.293 billion. The EDL in percentage of GDP stands at 33.6
percent.
Debt
Public Debt
Total public debt stood at Rs 22,820 billion at end December 2017 while Total Debt of the government was Rs 20,878 billion. Total public debt recorded an increase of Rs 1,413 billion during
first six months of current fiscal year the bifurcation of this increase is explained below:
·
Domestic debt registered an increase of Rs
582
billion while government borrowing for financing fiscal deficit from domestic sources was Rs 412 billion, indicating
an increase in government credit balances with the banking system during the period under review; and
·
Increase in external debt contributed Rs 830 billion to the public
debt, while, government borrowing for financing
fiscal deficit from external sources was Rs 384 billion.
Therefore, the increase in external debt signifies both borrowings for financing fiscal deficit as well as revaluation
losses due to Pak Rupee depreciation against US Dollar as well as appreciation of other currencies against US Dollar.
Pakistan's public debt dynamics witnessed various positive developments in the ongoing fiscal year; some of these are
highlighted below:
·
The government continued to adhere to the targets set forth in Medium Term Debt Management Strategy (MTDS) to ensure public debt sustainability.
·
Weighted average interest rate on the domestic debt portfolio has been reduced further while cost of external loans contracted by the government are mostly concessional as well as dominated by long term funding;
·
The
government successfully raised US$ 2.5
billion in December 2017 through a 5- year Sukuk and 10-year conventional bond with the latter issued at the lowest rate for a Pakistan bond.
Encouragingly, cost and most of the risk indicators of public debt portfolio improved over last four years. Average cost of gross public debt reduced
by over 100 basis points owing to smooth execution of the Medium Term Debt Management Strategy. Refinancing Risk
of domestic debt portfolio reduced from
64.2
percent in 2013 to 55.6 percent in 2017. Exposure to interest rate risk also reduced, as the percentage of debt re-fixing in one year decreased to 47.8 percent in 2017 compared to
52.4
percent in 2013. Similarly, share of external loans maturing within one year was equal to around 27.7 percent of official liquid reserves in 2017 compared with around 68.5 percent in 2013, indicating improvement in foreign exchange stability and repayment capacity.
EDL stock stood at US$ 88.9 billion at end December 2017 out of which external public debt was US$ 66.9 billion. External public debt increased by US$ 4.4 billion during first half of the current fiscal year. In addition to
net external inflows, translational losses on account of depreciation of US Dollar against other international currencies contributed towards increase in external public debt during the said period.
Recent Developments in Public Debt
Total public debt provisionally stood at Rs 23,608 billion at end February 2018 while total debt of the government was Rs 21,552 billion. Gross domestic debt recorded an increase of Rs 1,093 billion during first eight
months of current fiscal year while external debt increased by Rs 1,107 billion. In addition to financing of fiscal deficit, (i) increase in credit balances of the government with banking system; (ii) depreciation of Pak Rupee against US Dollar; and (iii) depreciation of US Dollar against other international currencies contributed towards the increase in debt.
EDL stock provisionally stood at
US$ 91 billion at end February 2018 out of which external
public
debt was
US$
69.3
billion Disbursements against external public debt were cumulatively recorded at around US$ 7,300 million
during first eight months
of current fiscal year while external public debt servicing was US$ 3,338 million during the said period.
·
·
The impressive growth in
revenue collection witnessed during
the first two quarters
could not be sustained in Q3-FY18. Yet, on
a cumulative basis during Jul-Mar FY18, it remained considerably higher compared to corresponding
period
of
last year. On the
other hand, building on the
momentum seen in first two quarters, expenditures grew
sharply in Q3-FY18
Together these have resulted in fiscal deficit rising to 4.3 percent of GDP during Jul-Mar FY18, against full year target of 4.1
percent and 3.9
percent
deficit recorded in the corresponding period of last year. Similar to overall fiscal
balance, the improvement in primary balance could not be
sustained either, signifying that
the non-interest expenditure grew at a faster pace relative
to last year. The improvements in revenue balance,
nevertheless, shows that revenue growth
still managed to
outpace the increase in
current expenditures Thus, acceleration in growth of expenditures
was
more due to development
spending, both at federal and provincial level. The provincial governments in particular,
revved up
the pace of development spending to fast track completion of the ongoing projects before the term of current assemblies came
to
an end. The
growth
in
federal development spending,
albeit slightly lower compared to last year, still remained high, above 24 percent
Fiscal
A sharp increase in expenditures, amid a
slower growth in revenue in Q3-FY18, led the fiscal deficit rising to 4.3
percent of GDP during Jul-Mar FY18 compared with 3.9 percent last year, and a
full year target of 4.1 percent. The
growth in revenue, though remained higher compared to last year, slowed down in
Q3-FY18 compared to first two quarters of FY18.
On the other hand, growth in expenditures accelerated from 12.4 percent
in Q1-FY18 to 23.4 percent in Q3- FY18.
The slowdown in revenue collection was
primarily due to direct taxes. More specifically, the drag came from a decline
in voluntary payments, while withholding taxes and collection on demand
increased considerably compared to last year. The decline in voluntary payments
can partially be attributed to reduction in corporate tax rate and lower bank
profitability. Meanwhile, growth in
indirect and provincial taxes remained buoyant in line with expanding economic
activity, and the pass-through of rise in the oil prices to domestic consumers.
The non-tax revenue also recovered strongly, bolstered by a jump in provincial
non-tax revenue, higher markup payment, dividend income and PTA /postal service
profit.
The acceleration in growth of expenditures
was more due to higher provincial spending, with both current and development
expenditures growing sharply. The
provincial development spending grew by 36.7 percent during Jul-Mar FY18
compared to 13.6 percent in the corresponding period of last year. Growth in
federal development spending also remained high, close to 25 percent compared
to 28.9 percent in last year. The push has come from urgency to complete the
ongoing project before the terms of assemblies came to an end. Similar to
growth in development expenditure, major contribution to a sharp increase in
current expenditure came from provinces, especially in Q3-FY18. Higher debt
servicing and defense spending at federal level and general public services,
economic affairs, and public order and safety in case of provinces contributed
to the increase in current expenditures.
The resulting higher fiscal deficit was
largely financed through borrowing from SBP and external sources. In case of
external financing, government heavily relied on commercial loans and sovereign
bonds. Moreover, the revaluation losses, resulting from appreciation of major currencies
against US$ and the depreciation of rupee against US$ also added significantly
to external debt. Overall, these developments led to considerable increase in
public debt, with record accumulation in Q3-FY18 since FY14.
Risk
Analysis
One of the most dynamic economies of South Asia…
Activity will likely continue to remain strong in 2018,
even if a slight deceleration is likely to occur in the second half of the
year. Household consumption (81% of GDP) is set to remain dynamic. After
suffering in 2017 due to the slowdown of construction in Gulf Cooperation
Council countries, expatriate transfers from the region (62% of the total)
should benefit from its recovery, particularly marked in the United Arab
Emirates (22% of flows). This will offset the tightening of monetary policy
(leading rate was risen from 5.75% to 7.5% between January and July 2018) aimed
at moderating demand and inflationary pressures linked to the depreciation of
the rupee and the rise in energy prices. On the other hand, investment (only
15% of GDP), already constrained by a mediocre business environment, could
decelerate further due to a drop in confidence in the face of deteriorating
balances. This would also affect investment in transport and electricity
infrastructures under the China-Pakistan Economic Corridor (CPEC) between the
Chinese region of Xinjiang and the port of Gwadar (South-West Pakistan). On a
more positive note, services (60% of GDP), industry (20%) – notably mining and
automotive –, and agriculture (20% of GDP) – with sugar cane, cotton, rice, and
wheat – will benefit from the vitality of consumption.
Thanks to the measures recommended by the International
Monetary Fund, the budget position improved markedly during the period of the
latest financing agreement between 2013 and 2016. The fiscal deficit (excluding
grants) fell from 8.5% to 4.6% of GDP. However, this trend has since reversed,
due to a less sustained increase in tax receipts, largely due to the fall in
household taxation in April 2018, combined with an increase in expenditure
before the July 2018 legislative elections. At the same time, the deterioration
could be temporary and fiscal efforts could resume. Public debt, still 60%
domestic and denominated in local currency despite increased recourse to
external financing, has increased considerably and will continue to weigh
heavily on the much-solicited banking system, leading to a crowding out effect
on private business investment, which is in great demand.
The current account deficit deepened in 2017-18 because of
a widening trade deficit. This latter should decrease with the recovery in
exports encouraged by the devaluation of the rupee, and the sharp deceleration
in imports linked to the stabilisation of oil prices and the reduction in
purchases linked to the CPEC. The trade deficit (10% of GDP in 2018) will
remain the main contributor to the imbalance. This is explained by weak
Pakistani exports (less than 10% of GDP), more than half of which consists of
textile products (home linen, clothing, cotton yarn), and the rest broken down
between agricultural products (sugar, rice) and a small share of manufactured
products. Competition from low-cost neighboring countries in the textile sector
is exacerbated by the overvaluation of the real effective exchange rate,
despite the fact that the Pakistani central bank allowed the rupee to
depreciate by 16% against the US dollar between January and July 2018. This is
in addition to import pressure resulting from strong domestic demand exceeding
growth potential.
Remittances from expatriate workers (7% of GDP) will
partially offset the trade deficit. The remaining deficit, as well as the
deficit (3%) associated with services and outgoing dividends and interest
payments, is financed by the increasing recourse to indebtedness since 2016
with China and, incidentally, on the markets, as well as by a drawdown on
reserves (which fell to the equivalent of 1.7 months of imports in June 2018).
However, the external debt – 80% owed by the public sector – still represents
only 31% of GDP, and is largely long-term and subscribed at concessional rates.
FDI is minimal, with most CPEC investments financed by Chinese loans. The new
government plans to conclude a new financing program with the IMF in order to
ease the external accounts. The United States has indicated that the financing
should not be used to service China-owed debt.
Government needs to pay attention (1) to the control of
inflation through effective and efficient monetary policy, (2) to increase
employment chances by the supporting and establishing new industries and (3)
advancing infrastructure. Government of Pakistan should also support Pakistani
export in order to mitigate increasing imports
and always encourage foreign direct investments. These outcomes will be
helpful in managing the economic growth rate of Pakistan.
Economic outlook
A slowdown is expected this fiscal year as
the country grapples with economic imbalances and both fiscal and monetary
policy tightening takes hold.
Forecast see growth of 4.7% in
FY 2019, and 4.7% in FY 2020.
The government has
set
a 6.2 percent real GDP
growth target for the growing external vulnerability and high
fiscal deficit will continue to
pose major down side
risks
to the achievement of this target domestic demand, lagged impact of
adjustment in energy prices, and
PKR
depreciation are likely to contribute
to higher CPI inflation
in FY19.
Smooth supply of staple food items
and soft oil price on
the other hand could offset these underlying pressures
and help keep inflation around the
target of 6 percent set for
FY19.
The government has
set
fiscal deficit target at 4.9 percent of GDP for
FY19, which is based
on a 12.7 percent anticipated growth in
FBR
tax revenues and a 10.0
percent increase in
expenditures, with greater
emphasis on current expenditure.
While the current budget has reduced tax rates
without rationalizing expenditure, achieving the fiscal deficit target in
this backdrop appears challenging.
On
the external side, the exports
growth
prospects remains encouraging on the
back of PKR depreciation; recovery in global demand; fiscal incentives for exports; ease in
power supply; and improved price outlook of rice
and cotton in the international markets. Also, the
growth in workers’ remittances is expected
to further gather some
pace, partly on account of the steps
taken
by the government and SBP
to attract inflows
through the official channels.
At the
same
time, a deceleration in imports
is expected due
to
proactive monetary management by SBP, PKR
depreciation and the
continuation
of administrative
measures to dampen the
domestic demand for non-essential import items.
However, the import bill is likely to
stay
high owing to a notable increase in international commodity
prices, especially of
oil. This would keep the trade
deficit high in FY19
as well. Furthermore, the
FDI
inflows are expected to remain
lower in FY19 than
last
year as a number of
CPEC energy projects are
in
their advance stages of completion. Therefore, in
overall terms, the high current account deficit, together with limited financial inflows, would continue to
keep the balance of
payments under pressure
Structural Reforms: Feb.,
10, 2019: Irrespective of whether we get IMF funds or not, Pakistan will
have to borrow money internationally to ensure we can survive the adjustment
period. The IMF’s stamp of approval will allow Pakistan to secure better terms
from other lenders as well. IMF money, a few billion dollars and released in
small tranches, is not of much importance for Pakistan but the Fund’s stamp of
approval is. The bigger worry, though, lies elsewhere. We have, historically,
been able to stabilize the economy whenever we have faced a macroeconomic
crisis. And this has been quite often. But we have been, every time without
fail, unable to turn that stabilization into sustained growth. We have not been
able to find the path from stabilization to growth. This has been the cause of
repeated crises for us. The main
problem here is that our economy needs very basic structural reforms.
Successive governments have been unable and/or unwilling to risk carrying out
basic reforms. The needed reforms are going to be quite disruptive and they
require a lot of management skills and competence. The state seems to lack the
will and the skill to manage such reforms. These reforms are also quite micro.
We are talking about basic changes in how we tax and whom we tax. We have to
get our property rights regime overhauled. It includes deep reforms in contract
enforcement, rule of law and access to justice. Bureaucracy needs very deep
reforms. The regime of subsidies needs to be overhauled. Entrenched interest
groups, whether they are industrialists, agriculturalists or traders, need to
be toppled from their position of privilege and power. The military needs to be
taken out of commercial activities or brought under the same rules as civilian
businesses. Old and outdated rules and laws need to be changed. This is true of
most of our laws but it is also true of the way the state does its business and
hires and manages its people. In other words, the state needs, to put it
mildly, rebooting after major changes have been made in its ‘programmes’. And
it is going to be a hard reboot. Is the state ready for this? Is this
government, which has come with public expectations of change, ready for this? These
changes, if implemented, will have lots of losers and gainers. The losers will
resist changes as much as they can. The government will need allies to
implement change and compensate or resist losers. Given the current political
scene, allies are not easy to come by for this government. How can the agenda
of reform survive in such conditions? Even the debate on the mini-budget was
hard for the government to manage. If major reforms are presented in such
conditions, how is the government going to manage these? The needed structural
reforms will also need very detailed plans for change and they will need high
levels of competence for the state machinery to be able to implement these
reforms. Leave aside issues of competence, meaning if we can get good reform
plans in place, the bureaucracy, currently, stands politicized and
disheartened. The threat of NAB and judicial overreach has paralyzed
decision-making. There is the issue of sequencing too. Not all
reforms can or should be undertaken at the same time the time of each reform
should be carefully worked out. Currently, we do not see any plans in place.. A
lot more focus of the government should be on working out the plans for these
reforms and how they are going to be sequenced and implemented.