Pakistan’s ability to withstand external shocks diminishes

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Pakistan’s ability to withstand external shocks diminishes
Amin AhmedUpdated October 08, 2018
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World Bank report says risks will remain predominantly on the downside with declining reserves and elevated debt ratios. ─ File

ISLAMABAD: The World Bank has said that Pakistan’s ability to withstand external shocks has diminished and risks will remain predominantly on the downside with declining reserves and elevated debt ratios.

In its South Asia Economic Focus titled ‘Budget Crunch’ released on Sunday, the World Bank says appropriate policy responses to correct these imbalances and increased buffers to absorb future shocks will reduce these risks and support a positive growth outlook.

Such responses would entail increased flexibility of the exchange rate, strengthening the fiscal position through renewed efforts to improve revenue collection and better coordination between federal and provincial governments to reduce public spending, the report says.

World Bank suggests immediate macroeconomic adjustments to correct large deficits

The country’s macroeconomic situation remains fragile. Consumption-led growth is expected to slow down due to fiscal and possibly monetary tightening. However, short-term measures for fiscal consolidation and export growth need to be complemented with implementation of medium-term structural reforms to uplift the economy out of frequent boom-and-bust cycles.

The report suggests that immediate macroeconomic adjustments are required to correct the large deficits. Rising global interest rates and tighter liquidity situation will pose challenges to Pakistan given the high gross external financing requirements.

The World Bank projected GDP growth to decelerate to 4.8 per cent in fiscal year 2019 as authorities are expected to tighten fiscal policy to correct imbalances. However, growth is expected to recover in fiscal year 2020 and reach 5.2pc as macroeconomic conditions improve. This recovery is conditional upon the restoration of macroeconomic stability, a supportive external environment, including relatively stable international oil prices, and a strong recovery in exports.

Inflation is expected to rise to 8pc (average) in 2019 and remain high in 2020, driven by exchange rate pass through to domestic prices and a moderate increase in international oil prices. The pressure on the current account is expected to persist and the trade deficit is projected to remain elevated over the next two years.

Remittances will continue to partly finance the current account deficit, although slower growth in member countries of the Gulf Cooperation Council will affect remittances. Foreign direct investment, multilateral, bilateral, and private debt-creating flows are expected to be the main financing sources in the near to medium term. The fiscal deficit is projected to narrow in 2019 due to post-election adjustments and some fiscal measures.

It is expected that there will be some scaling down of public investment spending at the federal and provincial levels, and increase in revenue collection through tax base expansion and other administrative measures.

Fiscal consolidation would improve debt dynamics, but the public debt-to-GDP ratio is expected to stay around 70pc of GDP during 2019 and 2020.

Growth deceleration and higher inflation are expected to slowdown poverty reduction in fiscal year 2019, though overall poverty decline is projected to continue reflecting GDP growth. The presence of safety net programmes will mitigate the negative impact of inflation on poverty.

The current account deficit increased to 5.8pc of GDP in fiscal year 2018, up from 4.1pc in fiscal year 2017. The widening current account deficit reflects the growing trade deficit as exports are not growing as fast as imports. Imports are growing fast due to high domestic demand and import-intensive investments related to the China-Pakistan Economic Corridor.

The State Bank intervened heavily in the foreign exchange market in the first half of 2018 to maintain the value of the rupee, resulting in a large decline in international reserves from $16.1 billion (2.9 months of imports) at end-June 2017 to $10.2bn (or 1.7 months of imports) by Aug 24, 2018.

Under intense market pressure, the currency depreciated by almost 18pc between Dec 1, 2017, and July 25, 2018. Post-election, with emerging political certainty, the rupee recovered three percentage points against the US dollar and was trading at Rs 124.3 per dollar on Sept 7.

The fiscal deficit has widened over the past two years — reversing fiscal consolidation efforts in previous years and raising public debt levels. The 2018 fiscal deficit (including grants) reached 6.5pc of GDP — a slippage of 2.5 percentage points compared to the budget target. This was due to limited revenue growth and large increases in recurrent spending at both the federal and provincial levels.

Consequently, Pakistan’s public debt reached 73.5pc of GDP by end-June 2018, significantly raising debt-related risks. The newly elected government recognises the need for macroeconomic adjustments to overcome these challenges and has already announced its plans to cut expenditures, improve the management of state-owned enterprises, and undertake revenue mobilisation reforms, the report says.

Published in Dawn, October 8th, 2018

@Nilgiri @Novice09

 

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Road to Washington
Khaleeq KianiUpdated October 08, 2018
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The Pakistan Tehreek-i-Insaf (PTI) government is caught in the dilemma of Imran Khan’s political commitments to deliver on the promise of the state of Madina and the ground economic realities of today’s capitalist world needing prescriptions of the International Monetary Fund (IMF).

The PTI’s economic team has been unluckier than that of the PML-N, which enjoyed an oil bonanza for five years and faced neither a water shortage nor a flood. After an initial course correction, the ruling party of the past enjoyed a modestly but continuously growing economy all along coupled with enough bumper crops to keep the population contented during one of the country’s lowest inflation cycles.

But the PTI faces a bumpy takeoff. All indicators suggest that economic growth is heading south and inflation is going north — a double jeopardy for the public at large. Various estimates put growth forecasts between 4.8 per cent and 5.1pc and inflation in double digits. The cycle takes time to end, but not before pushing people in poverty, joblessness and leaving other adverse impacts on the lives of ordinary citizens.

Fresh engagement with the IMF is important to attain credibility among development partners, bilateral lenders and international capital markets

Exogenous factors appear unfavourable at the outset as international oil prices stage an upward journey amidst harsh global economic conditions for exports and a looming water shortage. Of its own making is its wavering approach to address difficult economic questions, which is emerging as its most crucial challenge in the first eight weeks in office.

It took four meetings of the highest federal economic decision-making body to take the first unpopular decision: the highest gas price hike ever in one go. Its impact is a massive Rs112 billion. The body held seven meetings and yet struggled to be bold enough for a similar power tariff hike.

Of significance are also the opposite positions-cum-compulsions of the political leadership and its economic advisers of the traditional school of thought. The top leader banks on engagements with some friendly countries to avoid an IMF programme — as his political philosophy is built on breaking the begging bowl — or secure reasonable breathing space in the very short term to stay away from the IMF at least for the first 100 days.

Some of his economic advisers, both in and outside the cabinet, think differently. The delay is expensive, they argue, for not only the nation but also the government. The markets are already getting nervous with each passing day of falling external reserves, declining exchange rate and losing share values and market capitalisation.

Instead of wasting time on the optics, they demand tough decisions sooner than later. At best, the optics and economic actions should move simultaneously regardless of the by-elections on Oct 14 or the 100-day agenda.

A government official said that everybody in the PML-N government, except finance minister Ishaq Dar, knew currency devaluation was overdue. Similarly, everybody in the PTI government, except Prime Minister Imran Khan, knows Pakistan is going to the IMF.

They think external challenges are such that all options for fundraising should be used simultaneously and sequenced in a manner that consolidates each other. Friends can be helpful but to a limit, and after that they need an institutional framework to feel comfortable with. Therefore, fresh engagement with the Fund is more important for the country to attain credibility among development partners, bilateral lenders and international capital markets even if its financial support may not be required per se.

The IMF has, meanwhile, concluded that the country faces significant economic challenges, with declining growth, high fiscal and current account deficits, and low levels of international reserves. It has found recent policy measures to be in the right direction, but not yet sufficient. It wants decisive policy action and significant external financing to stabilise the economy.

The Fund has appreciated 18pc currency depreciation since December 2017 and asked for a complete free-float going forward instead of the existing managed free-float. In other words, demand and supply should determine the real currency value and interest rates should be closer to double digits to rein in excess demand. It has welcomed the huge gas price increase, expects a rise in electricity rates within days and seeks a second round of revision by Jan 1, 2019.

The Fund noted these steps would together help reduce current account pressures and improve debt sustainability. Some of these steps would be treated by the IMF as prior actions before an agreement on a new programme and others would become part of the policy matrix against which the programme performance would be monitored. It also wants more tax measures to make up for some of the slippery expenditure targets.

The medium-to-long term focus would then shift to priority areas like modernising the tax system and public financial management, strengthening fiscal federalism arrangements, improving governance and eliminating losses of public enterprises, enhancing the central bank’s autonomy, intensifying anti-money laundering/countering financing of terrorism efforts, improving the business climate and anti-corruption efforts, and fostering economic inclusion of the poor, youth and women.

Finance Minister Asad Umar and his team have largely endorsed the IMF prescription. They share the IMF’s assessment and have already committed to taking “further corrective measures to restore stability and inclusive growth,” adding though that fiscal and price adjustments alone are not sufficient and need to be supplemented by deep structural and institutional reforms.

Published in Dawn, The Business and Finance Weekly, October 8th, 2018