Pakistan under two sided pressure
One is from FATF a global task force that has already asked Islamabad to comply with 40 recommendations made by the Force in January 2019. Now another force i.e. APG an inter-governmental organization modeled on the lines of the Financial Action Task Force (FATF), is asking in curbing money laundering and terrorism. This is its second mutual evaluation by the AGP for Pakistan in the last ten years. The organization will submit its report after the ongoing on-site evaluation to FATF, which is expected to take it up in October. A non-compliance report from APG could push Pakistan further into a corner, sources say. In that case, they say, Pakistan faces the risk of being downgraded by multilateral lenders like the IMF, World Bank, ADB, etc. It may also be subject to a downgrade in risk rating by agencies such as Moody’s, S&P and Fitch, sources say.
Among the 40 FATF recommendations, Islamabad is said to be either fully or partially compliant with only eight, sources say. During the FATF review earlier, Pakistan had submitted a 26-point action plan in June 2018 to the task force and committed to implementing it over the next 15 months.
In another development Pakistan is likely to secure a bailout package from the International Monetary Fund (IMF) of between $6 billion and $12bn by the middle of May, Finance Minister Asad Umar has said. We’re approaching the landing zone,” said Mr. Umar. “The gap between our position and the IMF’s is significantly less than what it was a few months back.” Meanwhile Pakistan’s central bank has raised interest rate by 50 basis points to 10.75 percent on 29th March 2019, citing continuing inflationary pressures and a high fiscal and current account deficit. The State Bank of Pakistan said pressure on foreign exchange reserves had eased since the last meeting of the monetary policy committee in January, with improved stability on financial markets and better business confidence. Nonetheless, despite narrowing, the current account deficit still remains high.
This is not surprising that Emerging Economics Research MD Muzammil Aslam expected no change in the policy rate for the next two month along with BMA Capital economist Fawad Khan, whereas Elixir Securities’ Investment Banking Director Hamad Aslam foresaw only a 25-basis-point hike owing to rising CPI inflation, which was expected to touch 8.7% in March 2019 against 8.2%
But these economists and researchers all forgot that in February 2019. Market noise and T-bill secondary market yields indicated a bigger increase (of 50 basis points). These researchers are not new to this world as in Asian crisis and US crisis in 2007 all so called researchers predicted wrong and indulged the markets in to deep crisis.
In 2018-19 fiscal deficit of Pakistan stood at 7% of GDP. In current account the deficit stood at $ 19 billion i.e. -4% of GDP, the highest in its history. GDP growth was witnessed in 2018 at 5.8% but now in 2019 it has been projected by SBP below 4% for FY 2019. Pak Rupees valuation stands at Rs 141 per US dollar. Public Debt is 86.9% of GDP in which 33.7% is of external debt. In 2018 total debt servicing remained Rs 2.0 trillion as compared to Rs 1.8 trillion in 2017. In this External sector servicing was $ 7. 7 billion, which can be $ 9-10 billion in 2019.
So apart from politics, economically Pakistan stands at the lowest in the region against India, Bangladesh, and Sri Lanka.
In view of the massive current account and budgetary deficit that the PTI government inherited, the political instability fomented by PTI itself has given raise such deficits. It was quite evident that the rulers would have gone to the IMF for the 13th time in September 2018..
This is what the government has to do apart from getting loan/aid/investment from Saudi Arabia UAE, Qatar and other GCC countries along with China with its CPEC investments.
It is perhaps pertinent to mention that almost all the countries of the world obtain loans to fund their social and development plans as well as tiding over their balance of payment position and the lending institutions like the IMF, World Bank, Asian Development Bank and other international financing entities before extending loan facility to a client do make sure that the country has the ability to utilize those loans productively and also be in a position to repay them within the stipulated period.
Fulfilling those obligations would also require deep expenditure cuts without which the burden will fall on revenue mobilization which would entail substantial hike in taxes in the short term. Imran Khan recent announcement that FBR would be abolished if it didn’t work well is not going to work as to raise taxes there is a need to bring legislation for Agriculture, Services, Wholesale and Retail sectors to bring them in the tax net first of all and this can be done through Parliament only. Secondly restructuring of FBR with its provincial arms needs comprehensive changes and reforms. . Hence there is no escaping the reality that tax recovery now standing at 11-13% of GDP would not move upward as desired. So the biggest priority worth holding now would be to protect the poor and vulnerable from the impact of these adjustments.
The predictions by the international lending and rating agencies also present a very dismal picture about the state of our economy in the next two years. The IMF has lowered its 2019 economic growth forecast for Pakistan and the region by 0.3 percentage points to 2.4 percent before recovering to about 3 percent in 2020. Fitch has downgraded Pakistan’s rating from B to B negative in Decembers 2018 and its predictions for future revealed last week are also not very encouraging. It has predicted that the SBP will have to devalue rupee against US dollar again in the coming months as the currency will remain under depreciatory pressures with weaker external finances. It is also on the cards that SBP would continue tightening of economy through raising interest rates.
It is pertinent to mention that Imran Khan and his party stalwarts have been criticizing and reviling the PML (N) government for excessive borrowing and failing to provide relief to the masses. Ironically after assuming power the PTI government is also pursuing the same course with increased velocity. According to reliable sources the PPP government borrowed an average of Rs.5 billion a day for five years between 203-2018. The PML (N) government borrowed at an average of Rs.7.7 billion per day. The PTI government during the last five months has been borrowing at an average of Rs.15 billion per day.
Within next four months Pakistan has to bear current account deficit of around $ 15-16 billion + $ 9 billion as external debt servicing i.e. around above $25 billion. The soothing area is the remittances of around $ 19 billion that Pakistan can get from its Non residents.
On domestic front it would have to face a gap of Rs 1.5-2.0 trillion that has to be met through domestic borrowings.
Credit to Private sector borrowing has jumped over 92 per cent to Rs600.5 billion during July-Feb 22 compared to Rs312bn in the same period last Conventional banks’ lending doubled from Rs204.4bn to Rs409.8bn during the eight months whereas lending at Islamic banks also jumped to Rs90bn compared to Rs23.8bn last year. Islamic banking arms of the commercial banks also increased their lending to the private sector reaching to Rs100bn compared to Rs84bn last year. Hence this area has shown some interest in business activities.
Pakistan investment rate is 17% of GDP whereas saving rate is 12% of GDP whereas investment rate should be above 20% and saving rate should be above 15%. To do this concessions are required for the business community and raising of savings rates (specifically) for retirees, widows and old aged persons.
CPI or inflation rates have reached to 7% from 4% last year and are anticipated to touch 10% soon. This is going to affect life of low income people very much. How government is going to address this issue is yet to come on surface.