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Current Account Deficit: Pyrrhic Victory?

Mahmood-ur-Rehman

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In the name of stabilising the economy, economic managers of the PTI government have unwittingly grounded the economy in two years. There is a long list of facts that would establish this proposition without any risk of refutation. The trumpet repeatedly blown by PM Imran Khan and his cabinet members so far is the improvement in current account deficit. This needs to be dispassionately analysed, together with the assessment of economic losses incurred so far on this account in order to understand the reality.

Current Account Deficit (CAD)

As per official numbers of State Bank of Pakistan (SBP), the CAD during PMLN’s tenure was $3.13 billion in fiscal year (FY) FY2014, $2.81 billion in FY2015, $4.96 billion in FY2016, $12.27 billion in FY2017 and $19.19 billion in FY2018.

The last two fiscal years (FY) were extraordinary as forex payments were to be made for energy projects to end electricity load shedding, CPEC, infrastructure development and security-related heavy payments. CAD was to come down substantially in FY19 and onwards as bulk of extraordinary payments had been completed by FY18. PTI government has brought CAD down to $13.43 billion in FY19 and to $2.97 billion in FY20. But this reduction has not been achieved through increase in exports and is a result of mercilessly curtailed imports in the last two years, sky-high customs duty imposed on imports.


Surely, the tool used to achieve reduction in CAD has been imprudent as industrial activity suffered massively and halted, resulting in negative 10 percent growth in large scale manufacturing in FY20, as against over five percent positive growth in FY18. This has caused addition of millions to unemployment figures and has had a severe negative impact on the economy.

Economic Growth

The GDP growth of 5.8 percent achieved by PML-N government in FY18 has been callously brought down to 1.9 percent in FY19 and to negative 0.4 percent in FY20. Pakistan is seeing negative economic growth after 68 years since 1952. These numbers are indicative of how seriously the economy has been damaged. The negative growth rate of 0.4 percent for FY20 is visibly understated as it is based on a negative growth of around five percent in large scale manufacturing whereas it has finally closed at negative 10.17 percent. Like the 3.3 percent interim GDP growth for FY19 – which turned out to be 1.9 percent – the negative growth rate of 0.4 percent for FY20 also expected to end up around negative 1.5 percent.

Inflation

With output (growth) decreasing, prices are on the rise. In the last year (FY18) of the PML-N government, inflation was around four percent which rose sharply to 11 percent in FY20. This high level of inflation was not witnessed in last 13 years. Food inflation, which was one percent when the PTI took office in 2018, has shot up to 15 percent in urban and 18 percent in rural areas by the close of second year of the incumbent government. Consequently, princes of essential items have risen exponentially. Electricity and gas bills as well as medicines and petroleum products’ prices have also sharply escalated. The negative welfare impact of such increases in prices of utilities and essential commodities of daily use on the poorest segments of population has become totally unbearable.

Interest Rate

The SBP policy rate saw a massive increase from about 6.25 percent (2018) to 13.25 percent by March 2020. This was also unprecedented during the last decade. It effectively amounted to a huge transfer of wealth from investors to commercial banks, which kept lion’s share to themselves and passed on a small share to the depositors. But more importantly, it signalled that investment and growth were no longer on the horizon. Public debt servicing cost almost doubled due to such irresponsible handling of the policy rate by State Bank of Pakistan. Following Covid-19 pandemic, the unbearable policy rate of 13.25 percent was reluctantly brought down in phases to seven percent in March 2020 which would help the hapless business and industrial sectors. However, it has naturally resulted in withdrawal from Pakistan of $3.7 billion of hot-money deposits.

Exchange Rate

There is a misplaced perception that the previous government had artificially kept the exchange rate high, with the result that imports were too high and exports were suffering. As a result, the PTI government heavily depreciated the rupee from Rs.121/$ to Rs.169/$, a whopping 40 percent. This devaluation has caused an addition of over Rs5,000 billion in the public debt with regard to its external portion. There is hardly any realisation how badly this rupee depreciation has affected the common man through increase in prices of large spectrum of goods and services including those of food items and utilities, particularly electricity.

Imports and Exports

There has been a major improvement in trade deficit from $32 billion in the last year of PML-N government to $20 billion in FY20. This has happened on account of a major reduction in imports which fell from $56 billion to $42 billion, implying a reduction $14 billion or 25 percent. Such phenomenal decline is the reason for a massive fall in large scale manufacturing (LSM) activity in the country which has resulted in an unprecedented negative growth of 10.17 percent in LSM. Curiously, there has been a decrease of $2.5 billion in exports also, which again implies that economic activity slow-down is all-round.

GDP and Per Capita Income Losses

The GDP in dollars terms had increased by $84 billion from $231 billion to $315 billion during PML-N’s tenure 2013-18 which has declined by $51 billion to $264 in last two years of PTI’s rule. Likewise, per capita income which had increased by $318 from $1,334 to $1,652 has fallen by $297 to $1,355 in the same period. This is a very sorry outcome, a clear indicator of incompetence of amateurish economic managers.

Fiscal Deficit

The fiscal deficit was recorded at 6.6 percent in 2018, which was higher compared to where it was brought down during 2013-16 i.e. from 8.2 percent to 4.6 percent. The higher deficit in last two years of the PML-N government was because of the need for economic expansion warranted by higher foreign investments in CPEC, for elimination of load shedding from the country for which the government facilitated setting up of three LNG-based power projects with a combined capacity of 3600MW in the public sector (financed through use of its own foreign exchange reserves) and extraordinary security related expenses including financing of domestic wars against terrorism. Yet, without having a comparable development and security related agenda and investments, the PTI government has taken fiscal deficit to unprecedented heights of 8.9 percent of GDP in FY19 and 8.1 percent in FY20; if under-utilised Covid-19 relief amount of Rs540 billion and unspent federal development budget of Rs234 billion during FY20 are taken into account, then the real fiscal deficit for FY20 is Rs4,150 billion or 9.9 percent as against reported number of Rs3,376 billion or 8.1 percent of GDP.

Public Debt

The policies of high interest rate, imprudent depreciation, profligate spending and stagnant tax collections have all culminated into an unprecedented increase in gross public debt which has ballooned by Rs11.4 trillion from Rs24.9 trillion as on June 30, 2018 to Rs36.3 trillion in PTI’s two years of governance. The PML-N government had left the Debt-GDP ratio at 72 percent in 2018, after inheriting it at 64 percent in 2013. Therefore, it added about eight percentage points to the ratio after a five-year period but also contributed an average of 4.5 percent annual growth in the economy. On the other hand, in just two years, the PTI government has taken Debt-GDP ratio to 87 percent, adding 15 percentage points to public debt, while average annual GDP growth in this period has been only 0.75 percent.

Furthermore, despite PM Imran Khan’s public commitment (before election 2018) of reduction in public debt and liabilities by Rs10 trillion, there has already been a huge increase of Rs14.6 trillion in a short span of two years of PTI’s government, taking it from Rs29.9 trillion to Rs44.5 trillion.

IMF Program and Reforms

The PML-N government swiftly concluded and signed an IMF program on July, 2013 in order to remove confusion in markets as prediction of sovereign default within months was globally known keeping in view SBP forex reserves of $6 billion in June 2013, with outstanding amount of $4.6 billion payable to IMF. In 2018, when PTI government took office, the forex reserves with SBP were $10 billion with no possibility of sovereign default of its obligations. Choice with PTI was either to go quickly for an IMF program or go to international bond market to shore up SBP forex reserves as the PML-N had raised $2 billion in Euro Bonds in November 2017 at an average price of 6 percent. The PTI government remained confused and could neither tap the international bond market nor clinch quickly an IMF program which shook the markets and business confidence and added toll to our economic and ratings indicators. Having concluded finally, after great deal of time waste, a program with IMF, the government has in no time failed to implement the structural reforms and measures agreed in the program due to its weak performance and incompetence. Virtually the IMF program has been almost suspended for many months due to government’s inability to perform due to the economic mess created by it as a result of flawed monetary and fiscal policies.

Maligning of CPEC

An important source of forex support arranged by the PML-N government in 2013 was from CPEC investments. The PTI has a regretful history on this important arrangement of national interest. The infamous political 126 days sit-in of 2014 of Imran Khan in Red Zone Islamabad delayed the visit to Pakistan by almost one year of Chinese president, resulting in a corresponding delay in finalisation and signing of CPEC agreement between the two friendly countries. Soon after CPEC projects’ implementation started in 2015, Imran Khan and Asad Umer started a public campaign that CPEC was not an investment, but actually loans to the government of Pakistan and that, too, at an exorbitant cost of eight percent. In a regular quarterly review, IMF inquired about the veracity of allegations by PTI leaders and the scribe satisfactorily explained the factual position that barring very small amount for public sector projects at an average annual cost of two percent, entire remaining amount is investment in private sector projects, mainly energy, in Pakistan. Also, after taking office in 2018, the PTI government practically abandoned the CPEC for nearly two years. Unfortunately, CPEC projects were viciously maligned with accusation of corruption in press conferences by the PTI’s cabinet ministers. When Asad Umer as finance minister, was confronted by IMF, during program negotiations, with his past allegation about CPEC, poor guy had no choice but to confirm the truth about overwhelming majority investment in private sector projects and annual cost of around two percent on public sector projects; this was also reported on electronic media from Washington DC. The more one analyses the more one discovers an endless string of follies that the PTI leaders and government committed with CPEC, a project of national importance.

The CAD is an area over which PTI government has erected its entire castle of economic achievement in its first two years of governance. It has claimed that CAD as percentage of GDP in FY18 was the highest in history which they inherited. It is amazing how brazenly facts are distorted by the PTI as there have been periods of much higher CAD in country’s history, like in FY08 it was eight percent of GDP as compared to six percent in FY18. Curtailment of CAD through massive reduction in imports, including capital and development related goods, has played havoc with the domestic production, declined economic growth to negative 0.4 percent, sky-rocketed food inflation, escalated unemployment from 5.8 percent to over 10 percent and pushed 15 million more people below poverty line. PTI is touting CAD reduction as its greatest victory. But this is a pyrrhic victory, not worth the huge cost borne by the economy and the people of Pakistan.



The author, a UK Fellow Chartered Accountant, is former finance minister and former leader of opposition in the Senate of Pakistan. He can be reached on

Twitter: @MIshaqDar50
He is CA and not Economist
 

valkyr_96

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Wait were we living in the same Pakistan. The meltdown was happening during the caretaker government :



Pakistan's economic situation has further deteriorated during short tenure of the incumbent caretaker government that neither has intervened in the market to stabilise the currency nor increased the foreign exchange reserves.

The country's economic situation especially external sector is deteriorating due to widening of current account deficit and loan repayment. The financing of current account deficit and loan repayment has pressurised the local currency.

Pakistan rupee has devalued by around Rs 12 since June 1, 2018 when the caretaker government took the charge. Similarly, the country's foreign exchange reserves are depleted by one billion dollar during the tenure of interim government. However, the ministry of finance has not taken any concrete measure to stabilise the economy in its short period tenure.

"The caretaker government is continuation of the previous PML-N government, which is not serious in resolving economic issues of the country," said Dr Ashfaque Hasan Khan, eminent economist and former adviser to Ministry of Finance.

The previous government had handled the economy in a way that will force the new government to approach the International Monetary Fund (IMF) for fresh bailout package, he said in a talk with The Nation.

Sources in ministry of finance informed that caretaker Finance Minister Dr Shamshad Akhtar is against in intervening in market to control the currency value. The ministry of finance and State Bank of Pakistan (SBP) had allowed the rupee depreciation, which has recently touched the lowest 130 against the US dollar.
In her maiden press conference she said, "The market should be allowed for self correcting". Since then, the local currency had weakened by almost Rs12 against the US dollar, which increased the country's debt by Rs1200 billion.

Similarly, the country's reserves are declined by one billion dollar. The SBP's held foreign exchange reserves are decreased to $ 9.06 billion on July 13 as compared to $10.04 billion June 1 when the incumbent caretaker government assumed the charge.

However, no plan has been made that can show how to enhance the country's foreign exchange reserves. The minister had admitted that Pakistan would honour its commitment about loan repayment, but it would not be that easy.

The caretaker government once again clarified that it would not approach IMF for fresh bailout package. "No formal or informal talks will be held with IMF for new loan programme. The interim government had looked at the option of IMF programme within the federal cabinet and decided that we cannot start negotiations; she said and left the matter for the next government.

It is worth mentioning here that Pakistan's currency had devalued by around 21 percent since December 2017, as the dollar value has enhanced by Rs22.5.

The sharp rupee depreciation has added over Rs2000 billion in overall debts in last eight months.


KARACHI:Overwhelmed at the debt level and depleting foreign exchange reserves, Pakistan’s caretaker government has kick-started the process of seeking a bailout from the International Monetary Fund (IMF) to enable the incoming government to move along quicker if it chooses to exercise the option.

Very few would disagree that Pakistan would need another IMF bailout as foreign exchange reserves deplete to less than two months of import cover even after three separate rounds of rupee devaluation. With exports not nearly picking up pace and remittances failing to match, a widening current account deficit has taken toll on the country’s economy that faces several near-term challenges.

In this backdrop, Caretaker Finance Minister Dr Shamshad Akhtar said the groundwork for the IMF programme is being put in place. “Groundwork is being launched so that the incoming government, should it agree (on the IMF bailout), can proceed fast with its processing,” Dr Shamshad said while addressing media at the Pakistan Stock Exchange on Saturday.

“I (the caretaker government) can go to the IMF, but I am not … and leaving this decision on the new government.”

She said rebuilding foreign exchange reserves is an immediate and most critical priority of the government.

A massive import bill and repayments to foreign creditors have eroded reserves that dropped below $9.5 billion at the start of this month.

The minister suggested a change in approach to maintain the reserves at a stable level. “We should plan for six-month import cover instead of 3 months.”

Receipts from exports and workers’ remittances have remained insignificant to offset the massive impact of exorbitant import bill and debt servicing. The trend suggests the current account deficit would hit a record high of $18 billion (or 5.8% of GDP) in the fiscal year ended June 30, 2018, she estimated.

Similarly, the budget deficit has exceeded the set target of 4.1% of the gross domestic product (GDP) to 6.8% in FY18.

“This has soared due to some “off the budget liabilities (of the government),” she said.

The deficit would have been much more than the one realised if the government had fully spent the amount under the development programme.

“The expenditures’ overrun was Rs40 billion despite containment of PSDP (Public Sector Development Program) of the order of Rs334 billion,” she said.

The fiscal deficit has exceeded the set target by 2.7% due to shortfall of Rs679 billion in revenue collection. “Total revenue shortfall (Rs247 billion relative to original budget) would have been steeper without the tax amnesty scheme which contributed Rs89 billion,” she said.

Increased expenditure and accumulation of public debt has been due to some unexpected developments, including the fact that average interest rate rose by one percentage point, (excluding the one the SBP increased on Saturday), rupee depreciated by 14% in the last seven months and crude oil prices rose from $55 per barrel to $75.35 in the wake of international price movements, she added.

“(But) people don’t need to panic on public debt. US increased its debt during the last recession.

She added that the tax-to-GDP ratio has increased to 12.8% compared to 11.2% in the prior fiscal year, but needs to double as soon as possible.

Mr Dar conveniently skips the borrowing he had to do to shore up the reserves funding the CAD. Not only that numbers were dressed as off balance sheet items (Hello PHPL time to roll over and make fee income for the banking industry after that see you in the next five years).

I am afraid the damage has been done I don't see any chance of recovery far into the future. Ishaq Dar does not know that he is the guy that is being dipped in the cauldron in the Fraudiye video. His time will come.
 

valkyr_96

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Amid worsening economic conditions, caretaker Prime Minister Justice (retd) Nasirul Mulk has decided to take a briefing on the economy, indicating economic affairs as his top priorities.

The Ministry of Finance, the Economic Affairs Division and the Federal Board of Revenue have been asked to give a holistic briefing on the country’s current economic situation and near-term challenges on Monday, according to official sources.

In addition to seeking a briefing on the economy, Mulk also directed the government’s legal team to approach the Supreme Court of Pakistan against the Lahore High Court (LHC) verdict declaring nomination papers for the coming general election null and void.

ADB says ‘no need to panic’ over Pakistan’s economy

Like its predecessors, the PML-N government has also left the economy in a mess and the country is again facing the challenges of a yawning budget deficit and uncontrolled current account deficit.

The current account deficit – the gap between external receipts and payments – widened to a record $14 billion during July-April period of this fiscal year, according to the State Bank of Pakistan.

The budget deficit during the first nine months (July-March) also widened to a new record of Rs1.481 trillion, which is equal to 4.3% of Gross Domestic Product.

These three divisions are expected to present a realistic picture of the economy since their political masters have left the stage.

“If immediate corrective measures were not taken, the economic bubble may burst within the next fiscal year,” said an official of the finance ministry on the condition of anonymity.

He said that the finance ministry would present two to three options to the caretaker prime minister on handling the external sector of the economy.

There were internal discussions whether the finance ministry should advise the caretaker prime minister to review the possibility of initiating a dialogue with the International Monetary Fund for a new bailout programme, said the sources.

The discussion for the last bailout package of $6.2 billion had begun during the caretaker set-up and the programme was signed by the PML-N government in September 2013.

The country’s gross official foreign exchange reserves have slid to mere $10 billion by May 18, which are enough to provide cover only for two months import bill.

The steep decline in official foreign currency reserves has provided an opportunity to speculators to manipulate the rupee-dollar parity.

In order to tackle the situation, the Exchange Companies Association of Pakistan called an urgent meeting on Saturday and decided that the association would discourage speculative behaviour.

“The State Bank of Pakistan is no more in a position to defend the current rupee-dollar parity as it does not have the luxury to pump $200 million weekly in the interbank market,” said the sources in the central bank.

Against the interbank exchange rate of Rs115.7 to a dollar, the rate in the open market has shot up to Rs119.

The sources said that the finance ministry would also brief the interim prime minister about the challenges posed by the Financial Action Task Force’s (FATF) decision to place Pakistan on a grey list of countries that financially support terrorism.

Pakistan is required to present its Action Plan to Asia Pacific Group next week before submitting it for the FATF Plenary, scheduled to meet in the third week of June in Paris.

The Economic Affairs Division is expected to give a briefing on the country’s deteriorating debt situation. About $2.4 billion external debt payments will be maturing in May-June period, said the sources.

“For FY2018-19, about $8 billion external debt payments are due,” said the sources.

‘With political instability, economic activities sinking’

The PML-N government obtained gross foreign loans of over $44.2 billion in its five years tenure, which has now pushed the country into a debt trap.

There was an increase of 48% in the country’s total external debt and liabilities in the past five years due to the last government’s inability to attract sufficient non-debt creating inflows to meet Pakistan’s external account requirements.

The country’s total external debt and liabilities that stood at $61 billion in June 2013 have now shot up to $92 billion by end April.

The caretaker prime minister has also called the FBR for a briefing on the country’s revenue position. The FBR has so far managed to collect Rs3.274 trillion in revenues from July to May period of fiscal year, registering 14.4% growth in collection.

However, the tax machinery was supposed to attain 19.2% growth rate to achieve the annual collection target of Rs4.013 trillion.

The PML-N government lowered the target to Rs3.935 trillion that again seems an uphill task.
 

valkyr_96

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So good other person is CA from UK and having running experience of nation into the ground.
Why not mention that he won the best finance minister award for south asia?


but reality is that it had nothing to do with IMF and was a sponsored content (meaning he paid to get the award himself)


International Monetary Fund’s Mission Chief to Pakistan Harald Finger the other day said that the Emerging Markets newspaper does not belong to IMF amid revelations that five state-owned firms partially funded the publication’s latest edition, according to a report in the local media.

Last week, after the newspaper presented the Best Finance Minister of South Asia Award to Ishaq Dar and Best country in South Asia in infrastructure development to Planning and Development Minister Ahsan Iqbal, government functionaries jumped to congratulate them for winning such a ‘prestigious’ award to which Harald Finger said that Emerging Markets is an ‘independent publication’.

Both the respective ministries then claimed that the newspaper is a World Bank and IMF publication and that it was a matter of honour for the country that the publication bestowed these awards to Pakistani political personalities.

Planning ministry’s claims

The planning ministry also stated the paper’s standing by claiming that it was an ‘international institution’.

“Emerging Markets, which is an international institution, has declared Pakistan the best infrastructure development country in South Asia,” the ministry said. It further stated that Ahsan Iqbal received an invitation to Washington to receive the award

Funding

In terms of the papers funding it was stated that National Bank of Pakistan (NBP), State Life Insurance Corporation of Pakistan, Zarai Taraqiati Bank Limited (ZTBL), National Insurance Corporation Limited (NICL) and Pak-Arab Refinery Company (PARCO) gave advertisements to the paper last month.

The NBP spokesman insisted that the bank gave the advertisement due to its prestigious global standing. He further stated that nobody from the government pressured the bank to give the advertisement.

Newspaper version

“The Pakistan supplement, along with other supplements in the newspaper like Palestine, Vietnam and Argentina are sponsored content,” said Sara Posnasky, the magazine’s Head of Operations while responding to questions through email.

“Our awards are entirely independent of all sponsored content and advertisements,” said Posnasky. She further 0said that the publication has produced 60,000 copies over this year, which suggests that it is not a widely published magazine.
 
Apr 22, 2019
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The article details everything very well, section by section comparing 5 years of PML-N Government's successful performance against 2 years of failed performance by the PTI Government so far.

Surprised, no PTI supporter is throwing figures against it.

This is my favourite bit from the article:

The GDP in dollars terms had increased by $84 billion from $231 billion to $315 billion during PML-N’s tenure 2013-18 which has declined by $51 billion to $264 in last two years of PTI’s rule.
 

Rafi

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The article details everything very well, section by section comparing 5 years of PML-N Government's successful performance against 2 years of failed performance by the PTI Government so far.

Surprised, no PTI supporter is throwing figures against it.

This is my favourite bit from the article:

The GDP in dollars terms had increased by $84 billion from $231 billion to $315 billion during PML-N’s tenure 2013-18 which has declined by $51 billion to $264 in last two years of PTI’s rule.
You delusional mate.
 

Waterboy

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Instead of throwing shade at the author why don't we take a look at what he's written. He's not wrong. Apart from CAD all other economic indicators are in negative. GDP decreased and inflation is sky high. PTI thugs are like N took loansss. What about the loans taken by PTI in 2 years?
 
Apr 22, 2019
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You delusional mate.
This is true my frirnd:

The GDP in dollars terms had increased by $84 billion from $231 billion to $315 billion during PML-N’s tenure 2013-18 which has declined by $51 billion to $264 in last two years of PTI’s rule.

Deep down when PTI first came to power, I had hoped they will increase the GDP from $315 billion to around $500 billion by 2023 but it went backwards unfortunately by $51 billion.
 

Patriot forever

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The article details everything very well, section by section comparing 5 years of PML-N Government's successful performance against 2 years of failed performance by the PTI Government so far.

Surprised, no PTI supporter is throwing figures against it.

This is my favourite bit from the article:

The GDP in dollars terms had increased by $84 billion from $231 billion to $315 billion during PML-N’s tenure 2013-18 which has declined by $51 billion to $264 in last two years of PTI’s rule.
Bro over valued currency by subsidizing dollars or maintaining a currency at market value does not actually represent the change in GDP in real terms, it is just a metric.
If the government decides today to pump in 10 billion dollars, rupee will strengthen. Our GDP in dollar terms will increase massively. Will it mean an actual growth in GDP?

You should understand how currency works. The actual devaluation of rupee happened in latter part of Plmn term, it was masked by artificial dollar input in market, which was severely impacting our overall forex resources. The only thing PTI government did was weaned off this artificial support over a course of 6-9 months, further more they also starting addressing the forex strain that led to this devaluation.
 

Enigma SIG

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Ishaq Dar lol. Chutiya CA running an economy.


"The PTI government was much criticized for taking over nine months to go to the IMF. Finance Ministry officials revealed at the time that the initial plan under former Finance Minister Asad Umer had been to seek aid from other countries instead of approaching the Fund, for which a Finance Bill was also passed 12 months ago.

The delay meant that by the time the government implemented an IMF instructed market-driven currency exchange rate, the Pakistani rupee had already lost over 50 percent of its value against the U.S. dollar. However, in the six months since the IMF bailout agreement, the Pakistani rupee-U.S. dollar exchange rate has eased from around 165 to the current 155.

While the government’s delayed response aggravated the currency exchange crisis, financial analysts argue that its foundation were laid by the previous Pakistan Muslim League-Nawaz (PML-N) government, whose Finance Minister Ishaq Dar had kept the Pakistani rupee-U.S. dollar exchange rate artificially afloat around the 100 mark.

“There has been an annual 5 percent depreciation for the rupee against the [U.S.] dollar since at least the 1970s. Whenever you artificially fix the value – like [former Prime Minister] Shaukat Aziz fixed it around 60-65 or Dar at 100 – that depreciation isn’t allowed. And when you do that, the currency rates snaps back into its actual place [after the period of artificial valuation],” Financial Analyst at FX Empire Shahab Jafry told The Diplomat.

“Currency markets work on trends and sentiments. This snap forms a self-fulfilling prophecy, which generates a multiplier effect. And as a result we have seen the [Pakistani] rupee fall over 40 percent and not the 20-25 percent it would have fallen over the previous four to five years,” he added."
 

The Accountant

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In the name of stabilising the economy, economic managers of the PTI government have unwittingly grounded the economy in two years. There is a long list of facts that would establish this proposition without any risk of refutation. The trumpet repeatedly blown by PM Imran Khan and his cabinet members so far is the improvement in current account deficit. This needs to be dispassionately analysed, together with the assessment of economic losses incurred so far on this account in order to understand the reality.

Current Account Deficit (CAD)

As per official numbers of State Bank of Pakistan (SBP), the CAD during PMLN’s tenure was $3.13 billion in fiscal year (FY) FY2014, $2.81 billion in FY2015, $4.96 billion in FY2016, $12.27 billion in FY2017 and $19.19 billion in FY2018.

The last two fiscal years (FY) were extraordinary as forex payments were to be made for energy projects to end electricity load shedding, CPEC, infrastructure development and security-related heavy payments. CAD was to come down substantially in FY19 and onwards as bulk of extraordinary payments had been completed by FY18. PTI government has brought CAD down to $13.43 billion in FY19 and to $2.97 billion in FY20. But this reduction has not been achieved through increase in exports and is a result of mercilessly curtailed imports in the last two years, sky-high customs duty imposed on imports.


Surely, the tool used to achieve reduction in CAD has been imprudent as industrial activity suffered massively and halted, resulting in negative 10 percent growth in large scale manufacturing in FY20, as against over five percent positive growth in FY18. This has caused addition of millions to unemployment figures and has had a severe negative impact on the economy.

Economic Growth

The GDP growth of 5.8 percent achieved by PML-N government in FY18 has been callously brought down to 1.9 percent in FY19 and to negative 0.4 percent in FY20. Pakistan is seeing negative economic growth after 68 years since 1952. These numbers are indicative of how seriously the economy has been damaged. The negative growth rate of 0.4 percent for FY20 is visibly understated as it is based on a negative growth of around five percent in large scale manufacturing whereas it has finally closed at negative 10.17 percent. Like the 3.3 percent interim GDP growth for FY19 – which turned out to be 1.9 percent – the negative growth rate of 0.4 percent for FY20 also expected to end up around negative 1.5 percent.

Inflation

With output (growth) decreasing, prices are on the rise. In the last year (FY18) of the PML-N government, inflation was around four percent which rose sharply to 11 percent in FY20. This high level of inflation was not witnessed in last 13 years. Food inflation, which was one percent when the PTI took office in 2018, has shot up to 15 percent in urban and 18 percent in rural areas by the close of second year of the incumbent government. Consequently, princes of essential items have risen exponentially. Electricity and gas bills as well as medicines and petroleum products’ prices have also sharply escalated. The negative welfare impact of such increases in prices of utilities and essential commodities of daily use on the poorest segments of population has become totally unbearable.

Interest Rate

The SBP policy rate saw a massive increase from about 6.25 percent (2018) to 13.25 percent by March 2020. This was also unprecedented during the last decade. It effectively amounted to a huge transfer of wealth from investors to commercial banks, which kept lion’s share to themselves and passed on a small share to the depositors. But more importantly, it signalled that investment and growth were no longer on the horizon. Public debt servicing cost almost doubled due to such irresponsible handling of the policy rate by State Bank of Pakistan. Following Covid-19 pandemic, the unbearable policy rate of 13.25 percent was reluctantly brought down in phases to seven percent in March 2020 which would help the hapless business and industrial sectors. However, it has naturally resulted in withdrawal from Pakistan of $3.7 billion of hot-money deposits.

Exchange Rate

There is a misplaced perception that the previous government had artificially kept the exchange rate high, with the result that imports were too high and exports were suffering. As a result, the PTI government heavily depreciated the rupee from Rs.121/$ to Rs.169/$, a whopping 40 percent. This devaluation has caused an addition of over Rs5,000 billion in the public debt with regard to its external portion. There is hardly any realisation how badly this rupee depreciation has affected the common man through increase in prices of large spectrum of goods and services including those of food items and utilities, particularly electricity.

Imports and Exports

There has been a major improvement in trade deficit from $32 billion in the last year of PML-N government to $20 billion in FY20. This has happened on account of a major reduction in imports which fell from $56 billion to $42 billion, implying a reduction $14 billion or 25 percent. Such phenomenal decline is the reason for a massive fall in large scale manufacturing (LSM) activity in the country which has resulted in an unprecedented negative growth of 10.17 percent in LSM. Curiously, there has been a decrease of $2.5 billion in exports also, which again implies that economic activity slow-down is all-round.

GDP and Per Capita Income Losses

The GDP in dollars terms had increased by $84 billion from $231 billion to $315 billion during PML-N’s tenure 2013-18 which has declined by $51 billion to $264 in last two years of PTI’s rule. Likewise, per capita income which had increased by $318 from $1,334 to $1,652 has fallen by $297 to $1,355 in the same period. This is a very sorry outcome, a clear indicator of incompetence of amateurish economic managers.

Fiscal Deficit

The fiscal deficit was recorded at 6.6 percent in 2018, which was higher compared to where it was brought down during 2013-16 i.e. from 8.2 percent to 4.6 percent. The higher deficit in last two years of the PML-N government was because of the need for economic expansion warranted by higher foreign investments in CPEC, for elimination of load shedding from the country for which the government facilitated setting up of three LNG-based power projects with a combined capacity of 3600MW in the public sector (financed through use of its own foreign exchange reserves) and extraordinary security related expenses including financing of domestic wars against terrorism. Yet, without having a comparable development and security related agenda and investments, the PTI government has taken fiscal deficit to unprecedented heights of 8.9 percent of GDP in FY19 and 8.1 percent in FY20; if under-utilised Covid-19 relief amount of Rs540 billion and unspent federal development budget of Rs234 billion during FY20 are taken into account, then the real fiscal deficit for FY20 is Rs4,150 billion or 9.9 percent as against reported number of Rs3,376 billion or 8.1 percent of GDP.

Public Debt

The policies of high interest rate, imprudent depreciation, profligate spending and stagnant tax collections have all culminated into an unprecedented increase in gross public debt which has ballooned by Rs11.4 trillion from Rs24.9 trillion as on June 30, 2018 to Rs36.3 trillion in PTI’s two years of governance. The PML-N government had left the Debt-GDP ratio at 72 percent in 2018, after inheriting it at 64 percent in 2013. Therefore, it added about eight percentage points to the ratio after a five-year period but also contributed an average of 4.5 percent annual growth in the economy. On the other hand, in just two years, the PTI government has taken Debt-GDP ratio to 87 percent, adding 15 percentage points to public debt, while average annual GDP growth in this period has been only 0.75 percent.

Furthermore, despite PM Imran Khan’s public commitment (before election 2018) of reduction in public debt and liabilities by Rs10 trillion, there has already been a huge increase of Rs14.6 trillion in a short span of two years of PTI’s government, taking it from Rs29.9 trillion to Rs44.5 trillion.

IMF Program and Reforms

The PML-N government swiftly concluded and signed an IMF program on July, 2013 in order to remove confusion in markets as prediction of sovereign default within months was globally known keeping in view SBP forex reserves of $6 billion in June 2013, with outstanding amount of $4.6 billion payable to IMF. In 2018, when PTI government took office, the forex reserves with SBP were $10 billion with no possibility of sovereign default of its obligations. Choice with PTI was either to go quickly for an IMF program or go to international bond market to shore up SBP forex reserves as the PML-N had raised $2 billion in Euro Bonds in November 2017 at an average price of 6 percent. The PTI government remained confused and could neither tap the international bond market nor clinch quickly an IMF program which shook the markets and business confidence and added toll to our economic and ratings indicators. Having concluded finally, after great deal of time waste, a program with IMF, the government has in no time failed to implement the structural reforms and measures agreed in the program due to its weak performance and incompetence. Virtually the IMF program has been almost suspended for many months due to government’s inability to perform due to the economic mess created by it as a result of flawed monetary and fiscal policies.

Maligning of CPEC

An important source of forex support arranged by the PML-N government in 2013 was from CPEC investments. The PTI has a regretful history on this important arrangement of national interest. The infamous political 126 days sit-in of 2014 of Imran Khan in Red Zone Islamabad delayed the visit to Pakistan by almost one year of Chinese president, resulting in a corresponding delay in finalisation and signing of CPEC agreement between the two friendly countries. Soon after CPEC projects’ implementation started in 2015, Imran Khan and Asad Umer started a public campaign that CPEC was not an investment, but actually loans to the government of Pakistan and that, too, at an exorbitant cost of eight percent. In a regular quarterly review, IMF inquired about the veracity of allegations by PTI leaders and the scribe satisfactorily explained the factual position that barring very small amount for public sector projects at an average annual cost of two percent, entire remaining amount is investment in private sector projects, mainly energy, in Pakistan. Also, after taking office in 2018, the PTI government practically abandoned the CPEC for nearly two years. Unfortunately, CPEC projects were viciously maligned with accusation of corruption in press conferences by the PTI’s cabinet ministers. When Asad Umer as finance minister, was confronted by IMF, during program negotiations, with his past allegation about CPEC, poor guy had no choice but to confirm the truth about overwhelming majority investment in private sector projects and annual cost of around two percent on public sector projects; this was also reported on electronic media from Washington DC. The more one analyses the more one discovers an endless string of follies that the PTI leaders and government committed with CPEC, a project of national importance.

The CAD is an area over which PTI government has erected its entire castle of economic achievement in its first two years of governance. It has claimed that CAD as percentage of GDP in FY18 was the highest in history which they inherited. It is amazing how brazenly facts are distorted by the PTI as there have been periods of much higher CAD in country’s history, like in FY08 it was eight percent of GDP as compared to six percent in FY18. Curtailment of CAD through massive reduction in imports, including capital and development related goods, has played havoc with the domestic production, declined economic growth to negative 0.4 percent, sky-rocketed food inflation, escalated unemployment from 5.8 percent to over 10 percent and pushed 15 million more people below poverty line. PTI is touting CAD reduction as its greatest victory. But this is a pyrrhic victory, not worth the huge cost borne by the economy and the people of Pakistan.



The author, a UK Fellow Chartered Accountant, is former finance minister and former leader of opposition in the Senate of Pakistan. He can be reached on

Twitter: @MIshaqDar50
This must be in stupid and funny section.

The lies being told here are humongus.
 

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