Data suggest Pakistan faces prospect of financial meltdown

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An ice cream vendor pours chocolate syrup on an ice cream cone in Peshawar, Pakistan July 19, 2017. Photo: Reuters / Fayaz Aziz

Pakistan’s balance of payments position deteriorated significantly during the financial year ended June 30 as its current account deficit surged to an unprecedented US$12.1 billion due to a steep rise in imports and a drop in the foreign remittances. Exports also registered a downward trend.

Data from the Pakistan Bureau of Statistics (PBS) reveals that imports reached a historic level of US$53 billion, while the trade deficit was US$32.58 billion for the fiscal year 2016/2017.

Pakistan’s State Bank attributes the high volume of imports to projects connected with the China-Pakistan Economic Corridor (CPEC). Heavy machinery, equipment, and materials have all been imported from China for construction purposes. Meanwhile, the government has offered feeble excuses for the stagnation in the country’s exports, namely that global market trends have been unfavorable. Stalled growth in the volume of world trade and low commodity prices have not been helpful, certainly, but the fact remains that Pakistan’s exports have been falling since 2013-14, well ahead of those downturns.

The government’s policy of import substitution has in fact left little room for export promotion and diversification. The Export Promotion Bureau (EPB) and other government departments under the Ministry of Commerce have been doing nothing to promote exports of non-traditional items. They are not facilitating exports at all but rather creating obstacles to the growth of the country’s export base.

The government has claimed that growing imports are a sign that economic activity is expanding. This simply does not hold water, however, in the face of Pakistan’s mounting external debts – which reached a whopping US$79 billion at the end of financial year.The Government has been on a borrowing binge and broke all previous records to acquired US$10.1 billion in foreign loans during fiscal 2016-17 alone. About 37%, or US$3.9 billion of that borrowing came from China – Islamabad’s new lifeline. This sum includes US$2.3 billion in commercial loans and another US$1.6 billion in bilateral economic assistance.

The poor export performance and trade deficit forced a currency devaluation of more than 3% on July 5. This has exerted inflationary pressure on consumers, with a 10% increase in the cost of goods and services in the country already being felt

With a view to paying off old debts and supporting its foreign exchange reserve position, the government resorted to short-term commercial loans of over US$4.3 billion, against a budgetary allocation of US$2 billion. These expensive short-term debts, taken on the prevailing market rates, included US$ 1.7 billion from the China Development Bank, US$300 million from the Industrial and Commercial Bank of China, US$300 million from Bank of China, US$445 million from the UAE’s Noor Bank, US$650 million from a consortium of Suisse Bank, UBL and ABL, US$ 275 million from Citi Bank, and US$700 million from Standard Chartered.

The poor export performance and trade deficit forced a currency devaluation of more than 3% on July 5. This has exerted inflationary pressure on consumers, with a 10% increase in the cost of goods and services in the country already being felt.

Interestingly, the government has not owned the devaluation and has ordered a probe to determine the causes of the currency’s sudden depreciation. Finance Minister Ishaq Dar earlier put responsibility for the largest single drop in the rupee’s value at the feet of the State Bank’s acting governor, Riaz Riazuddin. The latter’s tenure has been cut short, with a new governor appointed on a three-year term.

Foreign remittances have shown a steady decline over the last couple of years. The data shows workers’ remittances fell 3.08% to US$19.3 billion during 2016-17, from US$19.9 billion for the year before. Remittances have financed Pakistan’s trade deficit for some time. If structural changes are not enacted to address current trends, Pakistan may well face an impending financial crisis.

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