Financial conundrum: Pakistan needs to declare an economic emergency
Pakistan’s GDP growth has been the lowest in the South Asian region since 2008. The core cause of the crippled economic growth has been the massive financial indiscipline of the current financial managers. The fiscal deficit (as a % of GDP) has been constantly above 6% since 2008. The government has been funding the ever growing deficit by Debt and printing money.
The increasing demand of the government to fund its deficits have resulted in a total debt of Rs10 trillion (up from Rs5 trillion in 2007). The data released by the State Bank of Pakistan indicates that broad money supply growth (M2) has averaged 11.5% over the past three years.
The recently released “Quarterly Performance Review of the banking system 2010” by the State Bank of Pakistan indicates that there has been growing evidence of banks’ flight for the government securities which now constitute around 30.4 per cent of banks’ assets compared with 19.3 per cent in Dec-08. Share of advances has witnessed a concomitant drop, from 60.8 to 52.0 percent during the past two years. Unsurprisingly, return on government paper now accounts for 34.5 percent of banks’ gross mark-up/interest income, compared to 28.8 percent in Dec-08.
Consequences
The currently prevailing interest rates are significantly beyond the comfort zone of the business community. As a result, the business community looks to consolidate and defer their projects that require significant capital deployment. It is very important to note that despite high interest rates prevailing in the country, the inflation rate has been soaring and no respite is expected in the short term as the government continues to borrow from the State Bank to plug their funding gap. It is very safe to assume that currently our economy is in the state of stagflation and it is expected to remain so in the short run.
The long-term consequences of ongoing budget deficits are drastic and will be felt in times to come. Firstly, the current budget deficits are not as a result of deficit spending towards Public Sector Development, instead only Rs300bn out of the budgeted Rs610bn were spent by the government in the previous year (as opposed to the case in India where the budget deficit is a result of massive Public Sector Development Spending). As a result, the infrastructure development necessary to promote economic growth remains ignored in toto. It is a matter of grave concern that the government has not been able to fully utilise the allocated PSDP fund over the last three years.
On the other hand the crowding out of private sector lending has impacted the private sector investment in infrastructure projects severely. A classic example is the delay in a number of power projects undertaken by the private sector. Data from various banks suggest that there has been on average 2-3 years of delay from the scheduled timeline for such projects to get commissioned. The result is the prolonged power outages and expensive electricity. If the current scenario prevails, Wapda expects that the power suffering could continue beyond 2018, not to mention the economic loss associated.
Bottom line
The bottom line is that unless the government takes strict measures towards spending cuts, seize additional borrowings, and utilize the deficit spending towards the infrastructure development, our economic nightmares will continue.
The writer is an Investment Banker by profession
Published in The Express Tribune, July 25th, 2011.
COMMENTS (18)
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@ meekal ahmed
a growth of 6.5% for Pakistan? India has approximately that much growth, after all the hard work done. Why day dream?
realistic growth rate for pakistan is between 1.5 to 2.00%. If you reduce the 2% you are speaking about, it will be zero growth rate. If population growth is considered, you ar in negative.
While financial mis-management has contributed, the main cause of below-trend growth is the on-going power crisis and a horrible security situation. The Economic Advisor's Wing of Finance calculated that the power crisis was shaving off 2% on our GDP growth rate. Other things remaining the same, if there was no power crisis, the economy would be growing at least at 6-6.5% p.a.
You also need to factor in the impact of other domestic (floods) and external shocks (soaring world prices of food and oil).
@Rehmat: Read before you fire buddy, i was trying to make a point about the stability and the realm of control of SBP since Shamshad Akhtar. "Criticizing deficit funding through SBP is what led Shamshad Akhtar to leave office."
@Saif: THe SBP government left - not due to criticizing spending but because he refused to fudge the govennment fudging of tax collection numbers for presenting to IMF.
The problem is that 40% of tax generated goes towards defense spending, 45% goes towards debt servicing or prior debts. How can the whole country run in just 15% of tax revenue - particularly when the tax to gdp ratio is one of the lowest in the world? The only way to reduce deficit is : 1) Improve tax to gdp ratio significantly 2) Reduce defense expenditure. Remember Bangladesh defence expenditure is a fraction of PAkistan and India has not gobbled it up. Nor has it gobbled up Burma, Nepal or Bhutan who have practically no standing army.The army's constant demonisation of India to use up a lion's share of nation's taxes nees to be questioned.
The country is feeding cannons instead of humans and the results are there to see.
@ Ali Turk: fully agree with your reflection.
Indeed the present set of mangers of country's finance have failed.We need solid professionals and it has to be a comprehensive approach to all aspects of the economy to get the country out of slow growth,high inflation,high unemployment trap.
@ARkhan: They have economies that back that debt, so it's not the same. From India I feel that Pakistan needs to hit rock bottom to realize that it's real 'strategic' assets are inside it's territory and not in Afghanistan and the little bit ofKashmir that is still with India.
Governments around the globe are having too much debt, US, EU, etc it is a new world order....
Economy is in tail spin, and recent article in Tribune about FBR attempting to give wrong figures of tax collection was a sad reading of the mind set and capacity of the FBR bosses.
I have been wondering,if the Country has $ 18 billion in reserves, why are we asking for additional loans at high interest rates or GDR offering high interest rate on dollars of 10% plus. Am I missing out on something?
I think the present Economic team of the country has to seriously sit down and share the correct facts with members of parliament an d the public and offer range of solutions to turn around the economy of the country in short,medium and long term.
Now one is hearing that Chairman FBR will also change in next few weeks: please post a person from within FBR who knows the internal working and capacity of the staff and units. And if this change of Chairman FBR takes place, this will be 4th Chairman of FBR in 4 years. How can Institution like FBR function this way.
all we do is criticize others of there mistake,by the way moral of this story is Pakistan economy is beyond Help... summarize is one sentence " Ya Allah Khair"
I agree with your recommendations in the bottom line. I wonder how optimistic you are about the current establishment taking measures in the direction you are suggesting. Criticizing deficit funding through SBP is what led Shamshad Akhtar to leave office. We almost always expect PSDP funds to be re-allotted midway through he year. GoP has a worse addiction to foreign funding than most heroine addicts. Sorry to sound pessimistic but the facts are in the statistics.
@Hina: The article is dissecting the state of the economy. The picture is gloomy and the solutions are reasonable. You still get a feeling that the financial managers are helpless and not much is going to change. You are worried about a miserable spell check. I feel you represent the majority sentiment, when 100 people die in a blast you ask, "so does that mean i dont have to go work tomorrow?". Focus on the issue at hand.
I hope aid dries out. It is time middle class of Pakistan came out of this fallacy we can manage on our own.... Electing corrupt leaders will lead to collapse. I really dont seem much happening for Pakistan as it was only sustained artificially by aid money. Economy never was strong enough to pull on its own. Devaluation also wont help. It is similar to losing the till rotor of helicopter and going into uncontrolled gyration... it has to hit the ground. infact it has happened we are just sitting on the wreckage!
We really need to bring-forth economic reforms otherwise we won't be able to cope with our problems. Anyhow, I stand of opinion that we are in a dire need of political stable country so that rating agencies could improve our image and foreign investment will flow to our country.
I would have expected things to remain the same in the long run. But now you have all this talk about a US debt default so I have to wonder how that will impact Pakistan's economy. Will it lead to an appreciation of the rupee against the dollar thereby lowering the Pakistani debt burder? Or will it cause massive inflation on a global level?
Fruits of democracy. Can't take the hard decisions due to fear of losing "votes".
unless we devalue our currency by 20 % min things will not change. KSE is going to crash in a big way very soon mark my words.
Tribune....Please run spell check on your articles before you publish them...."gvernment" is not a word