Economy under severe stress
By Khaleeq Kiani
Monday, September 08, 2008
Pakistan’s economy is fast approaching an insolvency-like situation. Liquidity is drying up. The cost to protect $2.7 billion sovereign bonds in the international capital market from preventing default, is increasing.
The external debt and liabilities have increased in rupee value by more than Rs705 billon in less than six months just because of over 25 per cent or Rs15 per dollar decline in currency value. The country’s overall external debt stock has increased by almost $7 billion to $47 billion since June 2007.
At the same time, the stock market has fallen to a 28-month low by registering over 42 per cent decline since April 2008. In the process, the stock market capitalisation has almost halved to $39 billion from a peak in April because investors generally avoid markets where there is political instability.
The government plans to introduce two weekly holidays (Saturday-Sunday) soon after presidential elections and close down petrol pumps for the third day (perhaps on Friday) to reduce consumption of petroleum products. The federal cabinet has already approved the plan and announcement would be made sometime this week. These measures are estimated to save about $3 billion per annum in oil consumption.
In another step, the government has already imposed higher regulatory duties on import of non-essential items while letters of credit (LCs) for imports are opened on 100 per cent cash margin to discourage misuse of foreign exchange. These two measures are anticipated to save about $1 billion per year. But the most worrying thing for the finance managers is the interest repayments on the back of dried up pipeline of financial inflows.
The country’s total debt stock now hovers around Rs7 trillion, up by about Rs1.4 trillion from Rs5.6 trillion in March 2008.This includes about Rs3.4 trillion domestic loan and Rs3.6 trillion in foreign loan and liabilities. For many years in decades, Pakistan’s external debt in rupee value has surpassed the domestic debt.
The cost to protect sovereign bonds from default that stood at 788.8 basis points on August 22 has increased to 975 basis points, overtaking Argentina’s number one position of being the riskiest investment paper. Foreign-exchange reserves have declined from their peak at $16.5 billion in October to just $8.89 billion, less than three months of imports, while trade and current account deficits are widening..
This is happening at a time, when foreign investors in the capital market are loosing confidence and flight of capital by Pakistanis mostly to the Middle East is gaining momentum. Despite remittances and exports on a mild growth path, the inflows are not catching up with the rising foreign currency requirements on the back of limited financial flows from multilaterals and bilateral sources. On top of that, the environment does not seem favourable enough to float major sovereign bonds or sell government entities because of political instability and overall security situation.
Meanwhile, the last year’s consolidated federal accounts showed that the budget deficit had increased to a record Rs777.2 billion or 7.4 per cent of GDP during 2007-08 that was met through the highest ever bank borrowing of Rs625 billion and over Rs75 billion cut in development expenditure. The most depressing feature was a massive reduction in revenue receipts that declined to 14.3 per cent of GDP compared with 14.9 per cent in 2006-07 despite higher revenues in absolute terms. In contrast, the total expenditure in 2007-08 increased substantially to 21.7 per cent compared with 19.2 per cent a year before.
The government is taking up with International Monetary Fund (IMF) at the top level to secure a letter of comfort that should help Pakistan persuade the World Bank and the Asian Development Bank to provide at least $1 billion in quick disbursement loans to overcome some of the immediate liquidity problems.
The senior level separate visits by the two bank officials last week have asked Pakistan to introduce tough decisions for macroeconomic stabilisation by allowing full pass-through in utility costs, removal of subsidies in petroleum products, reduced domestic borrowing and flexible exchange rate, so direly needed to reign in whopping fiscal deficit.
In this background, the IMF was expected to send its mission to Islamabad next week to take stock of economic situation on ground before issuing the required letter of comfort. Interestingly, both the ministry of finance and IMF’s office in Islamabad were unaware of the scheduled visit. Knowledgeable quarters suggest the government was trying to convince the Fund through some powerful capitals to help secure financing from the WB and ADB without going through procedural requirements given its severe financial problems as a goodwill gesture to support democratic forces.
Simultaneously, the PPP-government sent a delegation last week to Saudi Arabia with a wish-list of about $17 billion multi-year bail-out package for oil imports and balance of payment support. Led by foreign affairs minister Shah Mahmood Qureshi and comprising secretaries of finance and petroleum, the delegation met the Saudi leadership and sought oil supplies on deferred payments and other facilitations for budgetary support to boost foreign exchange reserves.
The delegation wanted to have a soft term credit facility of about $2.5 billion from Saudi Arabia for essential commodities like fertiliser, another $7.3 billion oil imports on deferred payments or reduced rates and rescheduling or write off of about $5.8 billion amount it was required to pay to the brotherly state on account of oil it had imported on deferred payments during 1999-2004.
Likewise, Islamabad also wanted to have an arrangement with Kuwait on special terms for diesel imports of over $4 billion over a period of two years. Pakistan imports about one million tons of diesel from Kuwait for Pakistan State Oil under a long-term agreement. Relevant government agencies believed the United States’ reduced crude imports from Arab countries offered good chances for Saudi support to divert its surplus production.
The members of the delegation were hopeful of a positive response expected to come soon after the presidential elections on September 6. Although the arrangements for imports of crude from Saudi Arabia are yet to be worked out, any relief from the brotherly nation are seen as the best solution to economic problems. This could provide reasonable breathing space to the government till such time it comes out of the political crisis surrounding presidential elections and concentrate on economic revival.
Sooner the country returns to political stability, overcomes judicial crisis and puts in place an economic revival plan, better it will be for the restoration of investor confidence needed to attract direct investment and revive capital market. That requires seriousness of the political leadership in economic revival, poverty reduction and macroeconomic stability.
Development goals: bridging the gaps
By Afshan Subohi
Monday, September 08, 2008
Total earnings of Rs7500, a little under $100 a month, from two jobs was not enough to make a living.
Mohammad Jaffar a young migrant working 14 hours a day in Karachi as a loader during the day with a contractor and a waiter at a small restaurant in the evening, was forced by demands of survival to vacate Rs3000( about $40 a month) rented house and shift to a hutment with his family.
Jaffar arrived in Karachi with his wife four years back. Despite being hardworking today he is deep into debt struggling to sustain his family of four children. One of the four, Azam is ill and dying for health care which is expensive and beyond means of his family.
But Jaffar still prefers to stay on in Karachi over going back to his home village in southern Punjab because he is still better off in the city. However, if this is better what the worse would be like?
For this family and their likes life is nothing but a painful journey into disappointments. Indeed, there is little to suggest that those in power really care.
The fate of poor in resource rich country is as dismal as it can get. Excluded from the gains of high growth during 2004-07, they are now being advised by the wise men of the government to endure more than their fair share of pain as the economy is under a difficult patch. For both internal and external reasons, Pakistan is currently grappling with high inflation and slower growth.
Today of 1000, some 79 infants die at birth, 99 more die before their fifth birthday. According to latest figures compiled by international economic monitoring agencies, Pakistan has the highest proportion of under nourished population in Asia Pacific region. The government might feel uncomfortable with such observations but would find it hard to challenge them because it is still busy collecting and processing data on social indicators for 2006.
Sadly this is where the country has reached riding the Asian tide-- what the ex-prime minister Shaukat Aziz used to call ‘stellar growth’ ----when the sale of motorcycles multiplied from 90 thousand to 900 thousand.
Some press reports suggest that the elected President will lead Pakistan’s delegation to the UN General Assembly in New York later this month. A few high profile meetings are reported on the sidelines of the meeting. But nothing has so far been published about one of the main themes of the UN Sept 25 meeting that is to review the progress on Millennium Development Goals. One wonders, with so little to show in absence of the current background material, how productive the participation of the political leadership would be in a meeting of 188 nations that made a solemn pledge to the eight goals in 2000.
At the half way point to the target year of 2015, the world prepares to meet to take stock of the progress made towards these goals. The leaders in words of UN are ‘to review progress, identify gaps and commit to concrete efforts, resources and mechanisms to bridge the gaps’.
Pakistan’s participation is expected to be as embarrassing as its progress towards 38 targets that it set out for itself to achieve eight goals. These MDGs are: eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality and empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria, and other diseases, ensure environment sustainability, develop a global partnership for development.
Pakistan committed to half the poverty rate to bring it down to 13 per cent by 2015.
The elected leadership is too preoccupied by other issues to spare a thought for MDGs or targets. The government functionaries have failed to deliver. No one expects any wonders from them but unfortunately, they have also not been able to bring out 2006 MDGs progress report in September 2008.
“The report of the year 2006 should be ready over the next few months” Dr Arshad Amjad, Chief Economist Planning Commission told Dawn from Islamabad.
Salman Farooqui, Deputy Chairman, Planning Commission, when contacted was unable to comment off hand on the issue. He, however, directed Dr Mohammad Aslam Khan, specialist on fiscal and monetary affairs, Planning Commission to respond to Dawn’s queries. The gentleman told Dawn that Pakistan is on track on many goals but was not able to justify the delay of the publication of the progress report that last appeared in March 2007 reviewing the performance for 2005.
Insiders told Dawn that the delay was because of the government’s interference in functioning of the cell responsible for processing and analysing data. “We are not allowed to work with numbers independently. All relevant numbers are audited by the government so that no number that the government perceives to be harmful to its political image is made public”.
“The government is very sensitive with poverty figures as they carry political weight. The last government forced us to suppress provincial poverty numbers as they reflected increasing intra provincial disparities”, a senior economist privy to the monitoring process said.
Most worrying is the low level of public awareness on the eight goals or the 38 specific targets. There is absolutely no pressure on the government from local stakeholders to reshape its spending pattern or re-arrange its order of priorities to achieve targets leading to sustainable development.
Most leaders and people, who should be spearheading the process in achieving those goals, when contacted, were little or not informed at all on the subject. Many admitted that they were hearing the word MDGs for the first time. This unaware mass includes people from all strata of society including drivers, clerks, plumbers, teachers, salesmen, doctors, lawyers, traders, housewives, etc.
Except in the Punjab, the situation in rest of the three provinces is bleak. In NWFP, some spade work started in 2005 but the tide of extremism and related law and order challenges did not allow the provincial government to move beyond planning stage. The Sindh government was found to be too fragmented to focus on anything worthwhile. Balochistan is too volatile politically to plan or execute a programme for MDGs.
Even the private sector that is supposed to be the key driver of the economy has totally been kept out of the picture in formulation of targets or their implementation. Tanvir Sheikh, President FPCCI admitted his ignorance about the goals this week over telephone from Multan.
It appears that so far it has all been a closed door ministry level activity. Yes, the reference is made to the goals in official documents such as Medium Term Development Framework (MTDF), the State Bank annual reports and the Economic Survey. The two progress reports were prepared primarily for the consumption of World Bank, IMF, UNDP, etc.