The IMF’s projections show a bleak path for the next five years. External financing would surge to $24.5 billion by June this year – to $27 billion next year – and would go up to $45 billion by 2023. At that time, Pakistan’s external financing needs will be equal to 10% of the GDP, which is a dangerous level.
GOING by the IMF’s latest post-program monitoring report, the economy continues to deteriorate, even as private-sector activity is gathering momentum. The government expects the GDP growth rate to rise to 6 percent by the end of the fiscal year, while the Fund projects the same figure at 5.6 percent. The difference is appreciable, but in both cases the trend is still upward, showing that the pace of activity in the economy is rising. But the external sector, the traditional Achilles heel of Pakistan’s economy, is rapidly deteriorating. Foreign exchange reserves are falling fast, mainly on account of a growing trade deficit that the government is struggling to contain through adhoc measures like regulatory duties and a slight depreciation in the exchange rate. The Fund report estimates that net international reserves, the figure we get after deducting key short-term liabilities as well as money owed to the IMF from the gross foreign exchange reserves, is now negative $0.7 billion. Back in 2016, when the last Fund program ended, the same figure stood at $7.5 billion. This is a very large decline, even though the gross reserves are still sufficient to cover just over two months of imports, above critical levels but below the benchmark for sustainability, which is four months. The decline appears to be driven by a fall in the gross foreign exchange reserves since September 2016 as well as a doubling of the State Bank’s own short-term liabilities in the form of forwards and swaps.
An obvious question asserts itself regarding these two developments: rising GDP growth rate and falling foreign exchange reserves. The question is, which of these trumps the other? Will the GDP growth and the attendant investments that lie behind it become some sort of auto-correcting mechanism, in due course driving up exports, boosting competitiveness and thereby arresting and reversing the growing current account deficit? Or will the continuously declining foreign exchange reserves eventually force an abrupt correction in the form of a large devaluation, hike in interest rates and collapse of domestic demand, as happened in 2008?
Projected out into medium-term future, common sense says that eventually economic growth bows to economic fundamentals, and not the other way round.
The report shows that the Fund staff and the government did not see eye to eye when looking into the future in the medium term. The government’s projections of the state of inflows and outflows of foreign exchange were clearly more bullish than that of the Fund. According to the Fund’s projections, gross foreign exchange reserves will not hit the critical level of one month’s import cover for another three years. There is still time for corrective action, but adhoc measures, which include short-term borrowing and regulatory duties, do not seem to be be doing the trick.
Certain tables in the report, which the IMF withheld in the past, show the adverse implications of the PML-N government’s borrowing spree over the past four and a half years. The policy of building foreign currency reserves through expensive loans and ignoring the export performance has come to haunt the policymakers.
Arranging financing at favorable rates will now be a challenge due to risks to the country’s debt sustainability, the report highlights– an observation many analysts in the country have been making over a year now.
Gross fiscal financing needs will likely exceed 30% of GDP from 2018-19 onward, in part reflecting increased debt service obligations, it added.
However, the more alarming part is the growing challenges to arranging foreign loans. It said Pakistan had so far remained successful in contracting external borrowing that softened the impact of rising external imbalances on foreign exchange reserves.
Mobilizing external financing at favorable rates could now become more challenging in the period ahead against the background of rising international interest rates and increasing financing needs– elevated current account deficit and rising external debt servicing, in part driven by China-Pakistan Economic Corridor (CPEC)-related outflows are expected to lead to higher external financing needs.
The early harvest projects– several major power plants and related projects in Punjab and and urban Sindh (Karachi) have been , fast-tracked to plug the energy crisis with a “bull by the horn” approach, but at a high acceleration cost, due to scaled-up imports of related plants and machinery, etc., several experts say.
Continued scaling up of CPEC investments could accelerate the build-up of related external payment obligations; Pakistan’s capacity to repay could deteriorate at a faster pace, with faster depletion of foreign exchange reserves having adverse effects on economic growth.
(Based on original reports and editorial in Dawn and The Express Tribune)