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Navigating through economic landmines

Abdul Rauf Shakoori & Dr. Ikramul Haq

Pakistan’s economy seems to be in a continuous struggle for revival. It has many structural challenges which needs to be addressed, this includes weak revenue collection mechanism, a challenging business environment, huge loss making State owned enterprises, high circular debt etc. The current coalition government of Pakistan Tehreek-i-Insaf (PTI) on coming into power made tall claims about economic governance and management. On the contrary it has delivered economic mismanagement, large deficits, below par growth in exports as compared to abnormally high devaluation, high inflation, and all this is tearing apart macroeconomic buffers.

The pressure on reserves has again started to mount and current account posted a deficit of US$ 3.4 billion (4.1% of GDP) for Jul-Sep FY2022 as against a surplus of US$ 865 million (1.2% of GDP) last year. Ministry of Finance believes that current account deficit has widened due to constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global commodity prices, food, and metals.

As per Pakistan Bureau of Statistics (PBS), during Jul-Sep, FY 2022, exports increased by 27.9 % to US$ 6.9 billion (US$ 5.5 billion last year). Exports grew by 27.7% to US$ 2.4 billion as against US$ 1.9 billion last year, whereas imports in the same period increased to US$ 18.7 billion as against US$11.3 billion last year), posting massive increase of 66.1%. The main imported commodities were petroleum products, palm oil, petroleum crude, iron & steel, liquefied natural gas, medicinal products, plastic materials, textile machinery, electrical machinery and apparatus, power generating machinery and raw cotton etc.

The export sector is currently performing well and the government needs to further support and strengthen it by offering affordable inputs like energy and attractive cost of funds, reduced rate of duties on import against raw material and machinery as all these factors combined, discourage firms to promote their exports. The World Bank reported that export market share of Pakistan had declined since 2000 wherein, US$13 out of every US$10,000 worth of goods and services exported worldwide originated from Pakistan, whereas, in 2020 these came down to US$ 11—the decline is across all sectors. Pakistan’s share in the global market for hides and skins, for example, shrank from 1.5% in the early 2000s to 0.8% in 2020. The share of Pakistan’s flagship export sector, textile and apparel, dropped from 2.3% to 1.8% over the same period. New sectors, especially ICT, must be promoted in order to diversify export portfolio.

Pakistan has already limited external buffers and with imports and financial liabilities increasing simultaneously, the impact on exchange rate is unprecedented and resultantly this heat is causing reserves to melt down. Earlier in September 2021, Morgan Stanley Capital International (MSCI) announced downgrading Pakistan Emerging Market (EM) Index into the Frontier Markets (FM) index. This is also one of the reasons that has stripped funds from Pakistani equities and consequently within first three months of the current financial year, Pak rupee has been amortized by more than 8%. Recently, the World Bank reported that between mid June 2021 to early September, the State Bank of Pakistan (SBP) pumped in approx. US$ 1.2 billion in the market in an attempt to support the sliding rupee.

Out of the country’s total debts, the external public debt forms a major component and with continuous depreciation of the currency the debt and liabilities are now almost equal in weight as compared to total GDP. External and public debts have reached alarming levels igniting depletion process for international reserves and to address these challenges, Pakistan has to look for a helping hand every few months. The “begging bowl” is getting bigger and bigger, and financial sovereignty as well as economic security has been a casualty as even defence expenditure is now met by bowered funds!  

The grip of foreign lender on economic decisions of Pakistan is getting stronger by each passing day, from transactional matters like determination of utility prices to strategic matters like taxation rates are now reposed by lenders and without any concern towards the impact and adversities on general public and businesses, all our local infrastructure works to achieve these targets.  Another example is about budget financing by SBP. The global lender discourages financing of budget by SBP which increased from around Rs. 3.6 trillion in FY 2018 to over Rs. 7.7 trillion in 2019 (around 20% of GDP). While entering into financing facility from International Monetary Fund (IMF), the SBP and the Ministry of Finance agreed to re-profile this existing debt into short- and long-term tradable instruments at neat to market interest rates. This is done with the purpose to create financial discipline and to force government to spend as per its earning. However, the government resorted to secure financing primarily from domestic commercial banks, through the issuance of Pakistan market treasury investment bonds and sukuks—these have increased debt servicing cost for government. Resultantly, the already narrow fiscal space is getting further narrowed for any new and meaningful initiative.

In the international arena, oil prices are hovering around US$85/barrel which is the highest since October 2018. In fact, the entire energy chain prices have witnessed a strong jump in the past couple of months. The PTI government has made attempts to absorb these shocks by compromising on petroleum levy and sales tax.  However, considering the limited fiscal space available with the government, this trend cannot continue for long and public is at the risk of greater exposure to tsunami of inflation.

The PTI government is managing its finances by adopting unconventional methods, like dallying energy payments, tax refunds etc. The stock of tax refund claims that have not been settled, as of December 2020, has mounted to Rs. 499 billion. Further, as per the disclosures in State of Industry Report 2021 of National Regulatory Authority (NEPRA), circular debt in power sector crossed Rs. 2.3 trillion mark by June 2021. This inefficient fund management is creating cash flow problems for industry. Delayed refunds force companies to arrange financing at commercial banking rates in order to meet their day to day expenses and rising circular debt results in frequent increase in electricity tariff pushing inflation to new heights—there are indication that it will be in double digits if curative measures are not taken. The common man is already going through hard times and with this unprecedented pace of inflation there does not seem any respite yet.

The PTI government must be cognizant of the fact that economic expansion can again lead to higher current account deficit forcing its funding from the financial support by developed nations or global lenders.  It seems that government has no concrete plan to address these challenges except focusing on short term and make shift arrangement to bridge the ever-widening fiscal gap. Standing on the verge of default, alarm bells are ringing and adhoc-ism will further deteriorate the overall fabric of the economy.


Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. Dr. Ikramul Haq, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions, with Huzaima Bukhari

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