Economic crisis and default fear

Govt in difficult situation since it will have to pay $21b to international creditors

Dr Talat Anwar June 13, 2022
Fiscal adjustment efforts, addressing worsening trade balance, mitigating political and economic uncertainty will result in slowdown in economic growth in the next fiscal year. Photo: file


Pakistan now faces daunting challenges in dealing with the economic crisis to meet its balance of payments needs and avoid economic default.

The budget deficit in the outgoing year 2021-22 is expected to be around Rs5,200 billion. Circular debt in the power sector is going to be Rs2,500 billion. Trade deficit has increased by 58% to about $45 billion whereas current account deficit would be around $16 billion.

Consequent to high imports and pressure on exchange rate, the forex reserves declined to $9.7 billion, which is hardly sufficient to meet 1.5 months of imports.

Pak rupee has been falling against US dollar continuously and has declined to Rs202 from Rs180 a dollar. Consequently, inflation rate has increased to 14% despite a rise in the policy interest rate to 13.75%.

Gross public debt increased to Rs44,365 billion or 75% of GDP. Consequently, the debt servicing would be around Rs3,900 billion during the next financial year. Total external debt and liabilities increased to $128 billion by March 2022.

Government is in a difficult situation since it will have to pay $21 billion to the international creditors for external debt servicing during the next financial year.

Country is facing a serious economic crisis in an environment of political turmoil and uncertainty.

If timely policy actions and corrective policy measures are not implemented, country can face a default and a crisis like Sri Lanka, which will have far-reaching implications for inflation, growth and employment and will affect the poor and the vulnerable segments of population.

Pakistan has no choice but to accept tough IMF conditions in order to restore the IMF programme to avert an economic default.

We all know that the country has already undertaken 22 IMF programmes in past and IMF policies and programmes have not proved to be a panacea to address the country’s economic woes.

It is noteworthy that most of our economic problems are spanning over the last 15 years as the country has been maintaining high budget and high current account.

Unfortunately, these deficits have been financed through borrowing from abroad, which has increased the debt burden on the country.

The nation with nuclear capability now faces a dilemma owing to inappropriate macroeconomic expansionary policies, higher government expenditures, losses of state-owned enterprises, untargeted subsidies, fixed exchange rate policy until 2017, and import-driven expansionary fiscal policy of the outgoing government in 2022 that led to a high current account deficit and put pressure on the exchange rate resulting in a persistently high double-digit inflation rate.

Though the new government has taken measures for removal of subsidies on petroleum products and put restriction on imported non-essential items, the country needs an immediate political consensus on a charter of the economy backed by the establishment to avoid an economic meltdown. Difficult decisions are needed over the next few months to stop the hemorrhage owing to overspending and over-importing.

First of all, Pakistan needs to restart IMF funding by implementing economic reforms in order to restore its credibility in the markets, along with continuation of CPEC financing.

Reforms to reduce high trade and current account deficits would require major cutbacks in expenditures and imports, but without adversely impacting the cost of living of low-income families whose lives have become miserable due to persistently high inflation over the last few years.

The government’s economic reform programme must include reduction in fiscal and current account deficits by half over the next one year by reducing fiscal deficit by Rs2,000 billion and non-essential imports by $10 billion consumed by the rich elite.

Import reduction must be achieved in the first three months to avoid an economic collapse and stop free fall of Pak rupee against US dollar.

This is essential for the belt-tightening of upper-income households, to send a signal that poor are not made victim of the economic mismanagement caused by the previous government. The economic reform programme must encompass the following measures:

First, through tax and credit policies, we must restrict growth of highly import-dependent industries (cars, luxury goods, electronics, etc) producing for the domestic market.

Second, declaring all exporting industries as tax-free manufacturing units, and ensuring to provide them all utilities at regionally competitive prices and subsidised credit. Bangladesh has increased its exports to $45 billion through this way.

Third, providing Rs800 billion of targeted subsidies as cash grant to 30 million poor and vulnerable families through BISP registry system to compensate for the rise in electricity, petroleum and food prices.

Once targeted subsidies are in place, market prices of these goods can be increased through higher tax rates and import duties, which would provide revenue for offering targeted subsidies to the poor and vulnerable groups.

Fourth, the non-development government expenditures must be reduced by Rs1,000 billion through cutting waste in civil and military institutions, cutting development expenditure and reducing throw-forward except for dams and water management, privatising the loss-making SOEs and reducing untargeted subsidies.

Fifth, there is a need to impose a tax to raise Rs1,000 billion to reduce public debt. This tax can be imposed on: (i) all assets (vehicles, agriculture land, urban real estate, and PSX shares) of individuals who own assets of more than Rs5 crore; and (ii) capital gains on real estate and shares, and profits of large companies. This is a sacrifice that should be given by the rich elite to save the country.

Sixth, reduce lending and deposit interest rates by 5% by reducing discount rate to 8%. This will reduce the cost of borrowing for the firms and accelerate the GDP growth and employment.

Low-income pensioners and widows can be given protection of income through higher rates on national savings instruments. The target should be to save around Rs700 billion annually on interest expenses on domestic public debt.

Finally, the country should impose a one-year embargo on all imported cars, cellphones, non-essential food and all manufactured home-use goods with the objective to reduce imports by $8-10 billion next year, which would reduce current account deficit, strengthen domestic currency against US dollar and accelerate growth and employment opportunities.

The writer has PhD degree in Economics from Sussex University, UK and has more than 37 years of experience at senior level positions in various national and international institutions


Published in The Express Tribune, June 13th, 2022.

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