What's new

Current Account Deficit: Pyrrhic Victory?

valkyr_96

FULL MEMBER
Apr 19, 2010
1,386
0
1,007
Here is a thread where PDF's financial wizards were no where to be seen:

Try to understand the chasm that exist between Pakistan and its counterparts:

Forex reserve is not a free-to-use resource
Foreign exchange reserve of BB cannot be used to meet local currency needs of development without affecting macroeconomic balance

In recent months, Bangladesh has experienced a sharp rise in its foreign exchange reserve. There has been a welcome increase in the inflow of remittances supported by the 2% incentive bonus introduced by the government. This has been accompanied by favorable movement in trade balance, as imports – both private and public remained sluggish against the decelerating exports. While use of foreign aid remained at a low level due to economic slowdown, there has been additional inflow of foreign aid to combat Covid-19 related crisis, which further contributed to the rise in reserve.
Bangladesh's foreign exchange reserve reached USD39 billion mark in August 2020. The reserve fluctuated between USD32 billion to USD33 billion for almost a year up until May 2020. It has been on the rise since then and mounted by about 6 billion to USD39 billion in August.

There has been a flurry of suggestions in recent times regarding possible use of the foreign exchange reserve of Bangladesh Bank for accelerated development of the country. Some enthusiastic experts have suggested using the reserve to train-up and financially support returnee migrants from abroad. Several misperceptions seem to underlie these suggestions. The misconceptions include the following amongst others.

  1. The reserve sits idle earning no benefits;
  2. There are no counterpart liabilities to these assets and therefore this free resource can be easily drawn upon to meet developmental needs;
  3. The Ministry of Finance and other government functionaries have a natural claim on this resource;
  4. The foreign exchange can be freely converted into Taka to meet local currency needs of development; and
  5. Import needs of the government can be easily financed from the reserve without any disruptive imbalance in the macro economy.
This write up is intended to clarify these misconceptions.

Functions and use of foreign exchange reserve
Foreign exchange reserve is an asset of the central bank, in our case, the Bangladesh Bank (BB). Section 7A of Bangladesh Bank Order, 1972 (President's Order No. 127 of 1972), has empowered BB to hold and manage the official foreign exchange reserve of Bangladesh. BB holds a good part of its foreign exchange reserve in Nostro Accounts, which are accounts that are held in foreign banks including foreign central banks in the currency of the country where the funds are held.


Countries with the most foreign currency reserves

The global money market experiences significant fluctuations in the exchange rate of major currencies and very irregular movement in interest rates. Therefore, it is risky to keep all foreign exchange reserves in one currency and BB maintains its foreign exchange reserves in different currencies. BB has established Nostro account arrangements with different Central Banks. Funds accumulated in these accounts are invested in Treasury bills, repos and other government papers in the respective currencies.
BB also invests in short term deposits with different high rated and reputed foreign commercial banks and also purchases high rated sovereign/supranational/corporate bonds. To diversify the portfolio and reap possible capital gains, BB also uses part of the foreign exchange reserve to hold gold.
Foreign exchange reserve maintained by BB serves two primary purposes. First, it provides the back up reserve to meet all foreign exchange claims on the country in the event of an adverse balance of payments situation. Second, it signals the financial strength of the economy to meet foreign obligations. Rise in foreign exchange reserve enhances the capacity of the country to make import payments, service foreign debt and facilitate repatriation of earnings of foreign investors, and hence, is a reflection of its credentials to attract foreign investment, have better credit rating and maintain stable exchange rate.
From that perspective, the liquidity of the foreign exchange reserve held by BB is an important consideration, and hence BB makes investment decisions pertaining to the reserve carefully to ensure optimum short term returns with minimum market risks. So, the perception that the foreign exchange reserve with BB sits idle is a totally incorrect one.
Counterpart liability and access of government functionaries
When any foreign exchange enters BB reserve by way of foreign remittance, export earning, foreign investment, foreign aid etc. BB's asset rises and at the same time a counterpart liability is immediately created. In most cases, the liability is in the form of Taka printed by BB, which is known as the High-Powered money or the Reserve money. The Reserve money, which forms the cash base of the economy, exists in either of the following four forms: (i) currency in circulation outside the banking system, (ii) commercial bank's balance with BB, (iii) currency in the bank vault, and (iv) deposits with BB of institutions other than commercial banks. Depending on the size of the money multiplier, the Reserve money generates a higher level of Broad money, and thus, causes an increase in the money supply.
The other form in which BB creates counterpart liability is by crediting foreign currency account of the beneficiary to the extent of foreign exchange inflow. In this case, there is no impact on money supply.
Clearly, the foreign exchange reserve of the BB is not without a claim tag and hence it would be totally inappropriate to consider it as a freely available resource. Moreover, being a balance sheet item of the BB, there is no automatic access of government functionaries to this resource.
Conversion into Taka
The suggestion that foreign exchange reserve of BB can be used to meet local currency needs of development is also misplaced. Since liabilities have already been created against the reserve, fresh printing of Taka against the reserve would create a balance sheet mismatch for BB with liabilities exceeding the assets. Moreover, Taka printing as explained earlier, influences money supply with concomitant impact on exchange rate and inflation.
Use of foreign exchange reserve to finance import
Imports are executed by opening Letter of Credit (LC) through commercial banks. The bank makes available the foreign exchange from its holding against equivalent Taka payment by the importer, which means that the importer purchases the foreign exchange to make the import. In most cases, such imports are based on borrowing of Taka by the importer. In some cases, specially in the case of import financed through Off-Shore Banking Units (OBUs), the borrowing is in the form of foreign currency and hence repayment also has to be made in foreign currency. In the former case (imports based on borrowing of Taka), import gets executed by reduction in foreign exchange reserve and corresponding reduction in Taka liability of BB with consequent impact on money supply. In the latter case (imports financed through OBUs), there is no change in the asset position of BB nor in its Taka liability thus keeping money supply unaffected.
This process of import applies to both private and public sector imports, except in the case of foreign funded projects, where import is financed by drawing down the foreign currency account of the importer.
For the government to draw upon the foreign exchange reserve of BB to finance its import, it will have to follow one of these alternative routes. The options are (i) to draw down foreign currency account, (ii) to purchase foreign currency with Taka out of budgetary resource, (iii) to borrow Taka from the banking system to pay for the foreign exchange, and (iv) to borrow foreign currency under arrangement for repayment in foreign currency.
Except for buying or borrowing foreign exchange in one of the above methods, the government cannot use the reserve of BB to finance its imports. If it compels BB to provide foreign exchange without appropriate repayment arrangement, it will, once again, create a balance sheet mismatch for BB with liabilities exceeding assets. This will also have implications for the exchange rate and the inflation situation.
So, the broad conclusion is that there is no free lunch. Foreign exchange reserve of BB cannot be used to meet local currency needs of development without affecting macroeconomic balance. Using the reserve to finance government imports will also have to follow the standard routes of either purchase or borrowing following standard regulations.
Nazneen Ahmed, Ph.D is a senior research fellow at the Bangladesh Institute of Development Studies (BIDS)

Samne-walay mulk me kasht-kaar or log maqrooz ho kar khudkushi ker rahay hain magar inko apnay reserves per fakhar hai.
 

Patriot forever

FULL MEMBER
Jun 2, 2020
541
1
947
Country
Pakistan
Location
Pakistan
lies of PTI social media team that were repeatedly sold to pakistanis -


1. we are going to default in 2018..

how can a country get an IMF loan when it is defaulting ?


2. pakistanis have stashed nearly 200BN USD abroad ( all laundered money)

asad umar said on live TV that this was a false claim



3. dollar will come down once CAD is zero

is dollar coming down?


-------

choose for yourself what to belive

2 years are gone . 3 remain


liar liar


----------------------------------------
1) We were definitely going to default if measures were not taken. That's why we went to IMF for a BAILOUT package. The bailout package is very less as compared to our needs, but what it does is improve confidence of other major lenders which were hesitant because of crisis we were going through. That amount by other leaders allowed us to roll over our matured loans and also pay of the interest.

2) PTI cross verified and questioned Ishaq Dar claim and he said he is correct regarding his 200 billion claim.
Screenshot_20200919-124151.png



3) In broader terms, we are far away from economic independence and still need financing to roll over our previous loans, our remittances are barely able to make up for the trade deficit which is a blessing in itself, but we rely on loans to even pay back the interest amount. There is a constant strain.

One more thing the state bank is pulling dollars from market (buying back) to increase reserves. More informed people can give a more comprehensive and detailed answer.
 

ziaulislam

ELITE MEMBER
Apr 22, 2010
13,275
10
11,845
Country
Pakistan
Location
United States

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
WTF did i just read?
Can believe how pakistan surivived this moron:o::o::o:
 

ziaulislam

ELITE MEMBER
Apr 22, 2010
13,275
10
11,845
Country
Pakistan
Location
United States
you are welcome to enlighten us with counter narrative against these points he made .Then we will assess your side arguments can reach to a point where we can comment piece of shit
Where were you? sleeping ?the counter narrative has been placed 1 million times over the news and another 2 million times on this forum by me..
So now what should i do? resign and keep answering every tom harry dick???

Is it so difficult to understand that PML N asked central bank to print unbacked notes (central bank lending) to finance spending that pushed growth from 4 to 5.2% at the expense of followup of inflation due to being unbacked notes and high imports of diapers and drop in exports???

Is it so difficult to understand that GOVT ASKED central bank to keep rupee high to cubble down inflation at expensive of killing exports and driving imports(literally if u overvalue something its like giving free money. If i pay 10 rs for 2 rupee pen i am giving u free 8rs)???

Is to difficult to understand that govt asked the central bank not to do monerty tighting (low interest rates)despite all indicators so it can generate huge amount of fiscal space for spending ???? Which caused historically low savings and bankrupted the country ???? Whats ur IQ 50??? Even my 12yr brother gets it?

Is it so difficult to understand that when PTI asked central bank to fix things which led historically high interest rates and thus huge fiscal deficit for interim period till CAD and revenues are fixed and which also led to increase in debt in rupees??? Is it so difficult to understand ?? Ofcourse not..its not!! Its simply about printing notes & spending it..just like what venezuela zimbabwe and sharif has done 9 times over now..pakistanis like you acts as *** who like to be *** over & over again..i mean 9 times ..wow..this is strong love...

There is another
Explanation though, those who believe ishaq dar are people who have a pakistani dream..

There is an american dream " work hard and progress" then their is pakistani dream
" become a jiyala matwala get hooked up and do corruption & get rich"
 

ziaulislam

ELITE MEMBER
Apr 22, 2010
13,275
10
11,845
Country
Pakistan
Location
United States
1) We were definitely going to default if measures were not taken. That's why we went to IMF for a BAILOUT package. The bailout package is very less as compared to our needs, but what it does is improve confidence of other major lenders which were hesitant because of crisis we were going through. That amount by other leaders allowed us to roll over our matured loans and also pay of the interest.

2) PTI cross verified and questioned Ishaq Dar claim and he said he is correct regarding his 200 billion claim. View attachment 671281


3) In broader terms, we are far away from economic independence and still need financing to roll over our previous loans, our remittances are barely able to make up for the trade deficit which is a blessing in itself, but we rely on loans to even pay back the interest amount. There is a constant strain.

One more thing the state bank is pulling dollars from market (buying back) to increase reserves. More informed people can give a more comprehensive and detailed answer.
Dont waste ur time
 

ziaulislam

ELITE MEMBER
Apr 22, 2010
13,275
10
11,845
Country
Pakistan
Location
United States
Might help the readers decide but we need to put out correct data.
If readers havent made their mind after 2 years of fact shaming then they are either morons(no offense), have stockhom syndrome or people who have a "pakistani dream"(live with corruption or die free). ..in any case You will still be wasting time..
 

Pandora

SENIOR MEMBER
Feb 15, 2013
6,261
7
9,262
Country
Pakistan
Location
Australia
Author of the article is the same SOB who left us with over 20 billion CAD and over 40 billion trade deficit. Cant believe people still ask the piece of horse shit for analysis on economy. If we have 20 billion deficit during during covid we would have gone broke in 2 months.
 

volatile

SENIOR MEMBER
Mar 11, 2011
4,019
1
2,601
Country
Pakistan
Location
Saudi Arabia
Where were you? sleeping ?the counter narrative has been placed 1 million times over the news and another 2 million times on this forum by me..
So now what should i do? resign and keep answering every tom harry dick???

Is it so difficult to understand that PML N asked central bank to print unbacked notes (central bank lending) to finance spending that pushed growth from 4 to 5.2% at the expense of followup of inflation due to being unbacked notes and high imports of diapers and drop in exports???

Is it so difficult to understand that GOVT ASKED central bank to keep rupee high to cubble down inflation at expensive of killing exports and driving imports(literally if u overvalue something its like giving free money. If i pay 10 rs for 2 rupee pen i am giving u free 8rs)???

Is to difficult to understand that govt asked the central bank not to do monerty tighting (low interest rates)despite all indicators so it can generate huge amount of fiscal space for spending ???? Which caused historically low savings and bankrupted the country ???? Whats ur IQ 50??? Even my 12yr brother gets it?

Is it so difficult to understand that when PTI asked central bank to fix things which led historically high interest rates and thus huge fiscal deficit for interim period till CAD and revenues are fixed and which also led to increase in debt in rupees??? Is it so difficult to understand ?? Ofcourse not..its not!! Its simply about printing notes & spending it..just like what venezuela zimbabwe and sharif has done 9 times over now..pakistanis like you acts as *** who like to be *** over & over again..i mean 9 times ..wow..this is strong love...

There is another
Explanation though, those who believe ishaq dar are people who have a pakistani dream..

There is an american dream " work hard and progress" then their is pakistani dream
" become a jiyala matwala get hooked up and do corruption & get rich"
really dillusional .First Govt was not printing money to support dollars they were increasing Tax base .Now i can understand the Dick in your above narration .You have no clue so ever what was happening . So i rest my case here
 

EpiiC

FULL MEMBER
Dec 4, 2016
1,137
-1
399
Country
Pakistan
Location
United Kingdom
Lol so we have to take the opinion of Ishaq Dar. The same guy who drove our economy to default and every single metric was floundering :partay:
Isn't he absconder? Din't he run away from Pakistan? I thought Pak government took away his passport? Isn't he a big criminal?
 

khanmubashir

FULL MEMBER
Aug 13, 2014
1,575
0
1,330
Country
Pakistan
Location
Pakistan

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
Writer ishaq dar ??? Says all ;)
 

Patriot forever

FULL MEMBER
Jun 2, 2020
541
1
947
Country
Pakistan
Location
Pakistan
interesting,

So PTI repeated the lies of Ishaq dar ?


they took a false conjecture from him and parroted it repeatedly, only to later claim it was false

?
interesting,

So PTI repeated the lies of Ishaq dar ?


they took a false conjecture from him and parroted it repeatedly, only to later claim it was false

?
From the article.

'In a detailed response to a question raised by Dr Arif Alvi of the Pakistan Tehreek-i-Insaf (PTI), the minister quoted statements by a Swiss banker and a former Swiss government minister: “One of the directors of Credit Suisse AG stated on the record that $97 billion worth of Pakistani capital was deposited only in his bank. Similarly, Micheline Calmy-Rey, a former Swiss foreign minister, is reported to have put the amount of Pakistani money hidden in Switzerland at $200 billion — a statement that was never contradicted,” he revealed.

There is no doubt not to believe given the source he quoted. Either he was balantly lying about the source given Plmn record, or the money was moved after it got exposed.
 

Users Who Are Viewing This Thread (Total: 1, Members: 0, Guests: 1)

Top