Financial Crunch Time is on the Horizon for Pakistan

[XYON]

Pakistan has almost run out of options. Expenses are through the roof with income about to run out. In this atmosphere I wonder how would the large government owned corporations and military production houses will survive? As of today reports are that the Government will not even have money to pay Government salaries come April 2011!! Where are they going to pay for the high end military procurements currently in the pipeline? For the first time in my life and while living in Pakistan, I can feel the meltdown approaching!!!! Maybe I am wrong! Only time will tell!

 

[Tayyab1796]

and yesterday our beloved PM Gilani has inaugurated luxury hostels for his fellow MNA's and a tunnel so that they don't get exposed to outside world while walking to and from Parliament house . Ironically , in the same speech he talked about economic threat forgetting that the said project will cost approx. 4 billion rupees . This is what happens when people who are not fit for the job are given highest positions when realistically they can't even manage a housing block.

 

[Impasse]

What exactly is the situation? And what is happening in reality..

I want some Pakistanis to comment on it.. Indians should refrain from making stupid post

 

[VCheng]

From my earlier post on this topic:

(There is a chart also)

from: Pakistan's troubled finances: Economic blasphemy | The Economist

Economic blasphemy
In saving itself, Pakistan’s government has jeopardised the economy
Pakistan's troubled finances

Jan 13th 2011 | from PRINT EDITION

ON JANUARY 3rd Pakistan’s central bank began printing rupee notes carrying the signature of Shahid Kardar, who was appointed governor of the State Bank of Pakistan in September. Unfortunately inflation has robbed money of over 15% of its value in the past year, and no let-up is in sight for the new notes. It is the most visible sign of an economy slouching towards another financial crisis.

At the start of the year the government raised petrol prices, prompting the Muttahida Qaumi Movement (MQM) to quit the coalition government led by the Pakistan People’s Party (PPP). It left the PPP “with a choice between saving the government and saving the economy,” as Maleeha Lodhi, Pakistan’s former ambassador to the United States and Britain, put it in the News, a Pakistani daily.

On January 6th the PPP made its choice, reversing the price rise. The decision has rescued the government but also robbed the exchequer of 5 billion rupees ($58m) a month. By the end of the fiscal year in June, the government’s deficit could reach 6.5% of GDP, according to Sayem Ali of Standard Chartered bank, or even 8% if oil prices continue to rise, according to Mohsin Khan of the Peterson Institute, in Washington, DC.

Pakistan’s budget has a lot to bear. The World Bank reckons that recovering from the summer’s devastating floods, which damaged over 1.6m homes, will cost up to $10.8 billion. To date, aid has been modest. Donors have pledged just $2.1 billion, or $11 per person, compared with $363 per person promised to Haiti after its earthquake —a slightly unfair comparison perhaps.

Yet Pakistan’s fiscal troubles are antediluvian. It is one of the most lightly taxed countries in the world. Fewer than a quarter of the country’s firms declare any taxable revenues, and only 11 out of every 1,000 of its citizens pay tax on their incomes, according to the World Bank. As a result, tax revenues amount to a mere 10% of Pakistan’s GDP.

The government had hoped to raise that ratio by broadening its sales tax, which is riddled with exemptions. Yet it lacked the heart to defy lobbies which slip through the threadbare tax net. They include exporters who escape tax on their domestic sales, as well as retailers and wholesalers who elude tax altogether. The proposed reforms also proved unpopular with the broader public, who resent paying anything to a government that gives them so little in return.

The government’s failure has jeopardised its agreement with the IMF, which is withholding the remaining $3.5 billion of the bail-out funds it offered back in 2008. At that time, the rupee was tumbling and Pakistan’s foreign-exchange reserves barely covered three weeks’ worth of imports. If the country is not yet in similar trouble, it can thank Pakistani folk abroad, whose remittances surged by 16.8% in the second half of 2010, compared with a year earlier (see chart). This is one reason why the rupee has not sunk further, and why the central bank’s reserves still cover six months’ worth of imports.

Yet foreign investment has slowed to a trickle, and higher commodity prices will add to the country’s import bill. Meanwhile, Pakistan’s foreign debt must be serviced. The finance minister is in a pickle. If Pakistanis lose heart, too, they may quit the currency, scrambling for dollars instead. Should that happen, Pakistan’s reserves will quickly vanish. And here is the big difference between 2008 and today: Pakistan has already had its IMF rescue.

from PRINT EDITION | Asia

 

[Avatar]

I dont think it will ever get so bad for Pakistan that the govt cannot pay salaries. That's just unthinkable. US will probably increase the aid (there already were some reports) and bail Pakistan out for it's own interests. If they dont, then China will.

 

[aristocrat]

Y dont u ask china to help u out.China is ready to buy debt of some european countries.

 

[apophenia]

Not need to be overly concerned as our ruling elite knows there are properties still to be acquired and how to get more aid from US and his proxies by harvesting home grown terrorists and keeping them in control under the umbrella of WOT.

 

[Mani2020]

ah.............. how much more worse can it get ...... these corrupt leaders ...why don't they die?

 

[Durrak]

OMG!!!The condition is that much worst
Now they want more aid to fill their pockets

 

[XYON]

Here is the problem!

a. Government is refusing to reduce its massive capital expenditure in the current scenario. Rs.10 billion Parliament Lodges new blocks are being inaugurated and in his speech the PM is lecturing on the need of austerity measures!

b. Funds are being diverted into frivolous projects such as Benazir Income Support Program, up keep of security measures for VVIP's etc! Funds are not reaching the correct place!

c. State Bank is printing currency notes overtime to compensate for the shortfall and to cover Government increasing expenses.

d. Business in general is down and most of the people lack sense of security and justice amid recent events.

e. The PRESIDENT is corrupt, the PM is corrupt, the PML(N) is corrupt, which is having a trickle down affect to the middle class feeling the pinch of NO ELECTRICITY, NO GAS, NO WATER, HIGH INFLATION

Under these circumstances, the PPP Government looks unwilling to take any austerity measures thereby creating more resentment among the masses! The Emigration to Canada, Australia and USA is also shooting up where people are now moving to safer and more secure heavens!!

This is the same scenario which was faced in the last PPP Government of Benazir where funds were depleted due to bad policies!! Looks like history has not been a good teacher to PPP!

 

[Mani2020]

So far we have just heard the promises this government made.

There are no jobs available even to those who have degrees from sophisticated institutes ,all seats in government organization are captured by the people who have links to these political parties .

After striving so hard to get degrees people are still unable to run their houses as a result either they are committing suicides or getting attracted towards these terrorist organizations .

In a country of youth when there will be no opportunities for advancement ,then what the hell will they do? as a result most of our talent migrates and serve other countries

I don't know when this PPP and Pml(n) era will end and we will see a new sunshine

 

[Mani2020]

People who are shouting for PTI to come to power ,they must know that PTI also contains many lotas of PML (N) ,due to the inability of Imran Khan to solely fund the party and due to lack of support now they have included many lotas .

If the body is sick ,head can't perform function effectively, and thats gonna be case with PTI .only the head is changed rest is same

 

[AUz]

People who are shouting for PTI to come to power ,they must know that PTI also contains many lotas of PML (N) ,due to the inability of Imran Khan to solely fund the party and due to lack of support now they have included many lotas .

If the body is sick ,head can't perform function effectively, and thats gonna be case with PTI .only the head is changed rest is same

Sir koi achi khabar? Karein to kya karein?? koi rasta? What you suggest? Any solutions?

 

[flameboard]

If the country wants to avoid this then everyone has to spend wisely and only buy as much as they need. Doing so will leave more products in the markets making them available for everyone to buy, in effect keeping the markets steady.

 

[blain2]

The game being played by the PPP government is to borrow time and get money from the IMF by taking minor, cosmetic actions. They know that they probably will never rule as a party again and would rather that this becomes someone elses problem after they are gone. Here is one of too little, too late:


Govt readies plan to win over IMF
From the Newspaper
(6 hours ago) Today
By Khaleeq Kiani

The government’s economic team feels confident that the measures are enough to bring back on track the standby programme with IMF.—File photo

ISLAMABAD: The government has prepared a revised economic plan envisaging a drastic 50 per cent cut in the development programme, scaling down revenue target by more than five per cent and two weekly holidays for the entire public sector to narrow down a daunting fiscal deficit to a level acceptable to international lending agencies and political parties.

The government’s economic team feels confident that these measures were enough to bring back on track the 11.3 billion standby programme with International Monetary Fund derailed since May last year.

The step will also help the government restrict the fiscal deficit to five per cent, background discussions with senior finance ministry officials suggest.

In a recent meeting with the World Bank, Finance Secretary Dr Waqar Masood Khan is reported to have tried to allay concerns that the government was sidestepping benchmarks agreed to with lending agencies on macroeconomic front, resulting in holding back of foreign inflows by aid agencies.

He is reported to have told the World Bank that the government had engaged in a meaningful dialogue with political parties to have a broader ownership of the budgetary restructuring.

An IMF mission in this background is expected to visit Islamabad in the last week of current month to restart negotiations on future outlook to review progress achieved through the political dialogue.

Informed sources said the government had revised the revenue target to Rs1575 billion for the current year, against an original estimate of Rs1667 billion because it did not expect sizable return from a couple of tax measures including reformed general sales tax that may not come into force this year and is likely to be delayed till July 1, 2011. The PSDP is also being envisaged to be restricted between Rs100-120 billion.

The two weekly holidays are being proposed as part of austerity measures that also envisage mandatory limits on non-salary current expenditures. These measures would be provided to PPP-PML-N parliamentary committee for consideration.

The renewed hopes of budgetary controls are based on financial results of first six months of the current year. The federal government has restricted releases for development programme to a paltry Rs69 billion or just 24.6 per cent of the total PSDP.

In normal circumstances, an amount of Rs140 billion should have been utilised in the first six months, accounting for 50 per cent of the Rs280 billion original PSDP.

As a result, the overall federal expenditure has been restricted at about 40 per cent of annual allocations. This has helped the federal government to reduce its State Bank of Pakistan borrowing to Rs119 billion from Rs400 billion a few months ago.

This included adjustment of $635 million foreign inflows from the United States and central bank’s profit to the federal government.

Likewise, the overall expenditures of the provincial governments have been limited at 35 per cent of total budgets envisaged for the first half of the fiscal year.

Informed sources said the provincial governments had almost blocked releases for the development schemes during the second quarter (September –December 2010) of the fiscal year in the aftermath of floods.

As a consequence, the provincial governments have together been able to provide a cash balance of Rs69 billion. The Punjab government that has been breaching its overdraft limits for more than 21 months has moved into cash surplus, obviously helped by the State Bank’s decision to set aside for the time being repayments of the principal overdraft. As a result, the Punjab government is servicing only its interest payments.

In the process, however, a number of social sector initiatives and routine public services have badly suffered. For example, the Punjab government has blocked funds to hospitals and educational institutions for maintenance and provision of medicines and equipment and delaying payments against civil servants’ TA & DA (travelling and daily allowances) for five to six months.

A disagreement, however, still persists between the ministry of finance and the planning commission over the exact size of the Public Sector Development Programme (PSDP) for the current year.

The finance ministry wants to trim down the federal development programme from budgetary allocation of Rs280 billion to about Rs120 billion – a reduction of about 57 per cent and had already moved a summary to the prime minister for approval.

The planning and development division, however, insists on utilisation of Rs170 billion for the development programme with the help of a foreign exchange component of about Rs16 billion, allowing the federal government releases of Rs140 billion and Rs10 billion for Earthquake Reconstruction and Rehabilitation Authority.

The prime minister, informed sources said, did not approve the finance ministry’s summary for cuts in development programme until he had a presentation by secretaries of finance and planning.

RED AREAS

The concerns, however, remain over rising petroleum prices in international market and about Rs229 billion demands from three loss making entities that could push up the fiscal deficit.

The cabinet committee on restructuring was told at a recent meeting that Pakistan Railways, Pakistan International Airlines and power companies called for liquidity injection of Rs27 billion, Rs37 billion and Rs165 billion, respectively.

The government has although rejected these demands for want of more prudent financial restructuring, these two head together pose serious threat to the revised budgetary projections because of huge circular debt and subsidy requirements.