Diminishing external inflows

Published: December 22, 2011
The writer has served in the Planning Commission and the IMF 

The writer has served in the Planning Commission and the IMF [email protected]

There is heightened concern over how Pakistan will cope with the prospect of sharply reduced external financing inflows. At the time of the budget, a number of optimistic assumptions were made on this count. Such embellished expectations are not unusual since all governments indulge in poetic license with numbers. Recently, this esteemed paper reported the sharp divergences of opinion in regards to the projections of external inflows being made in the Ministry of Finance and the State Bank of Pakistan (SBP), with the latter striking a more cautionary tone. If the SBP’s projections are closer to the most likely outcome and assuming no change in policy direction, the picture that emerges is a daunting one.

The key issue is one of timing since most of these inflows will eventually come in when a longer time horizon is considered. But Pakistan needs the financing to come in during this financial year, not later. First, given the ongoing sovereign debt crisis in the eurozone, the much hoped for $500 million OGDC convertible bond flotation is dead in the water. Second, Pakistan is still owed some $800 million in connection with the privatisation of PTCL. News reports had said that a high-powered delegation had visited Etisalat recently but, they returned empty-handed. Third, a number of second tier public enterprises have, reportedly been put on the privatisation hit list. This is a slow moving process and in any event, is unlikely to entail big amounts. Fourth, there is the possibility of the sale of 3-G licence but, here again, the process could be slowed by the need to be careful with the bidding process, lest our hyperactive judiciary jumps into the act and stalls everything. Fifth, absent a Letter of Comfort from the IMF which would have served as an endorsement of our macroeconomic policies, the Asian Development Bank has informed Pakistan that there will be no quick-disbursing programme loans to support the budget and the balance of payments. A similar stricture would apply to the World Bank as well.

Sixth, there are the expected official aid inflows. Although the US has frozen some $700 million in aid, a statement by Washington that this does not apply to civilian assistance, leaves a murky picture. In any event, assistance from the US or from other donors is almost entirely tied to projects. Given that the present project ‘pipeline’ is overcrowded and some five years deep, a slowdown here could be a blessing in disguise since it would allow the already-overstretched project implementing authorities to focus on completing the projects they have in hand. Finally, there are reimbursements from the Coalition Support Fund. However, given the present frayed state of US-Pakistan relations, the US government will take their time over ‘verifying’ our bills which are not known for being shining examples of honesty.

The prospect of significantly reduced external financing means that there will be exante ‘financing gaps’ that will have to be filled expost. This would apply to both the domestic and external gap. In the case of the former, the most recent data offers some mind-boggling numbers.

Without any concerted effort at base-broadening (the much-hyped attempt to target Pakistan’s super rich has predictably degenerated into a farce) and combined with unchecked spending pressures at the federal and provincial level, government borrowing for financing the budget, propping up the collapsing public sector enterprises and financing the circular debt and commodity operations, will continue unchecked. If we just take government borrowing for budgetary support, this has risen to Rs668 billion in the first five months of 2011-12 compared to Rs79 billion in the same period in the previous year. That works out to an increase of over eightfold. While borrowing from the State Bank has been sharply curtailed, borrowing from the commercial banks has gone up with negative implications for inflation and crowding-out of the private sector, which is the main engine of growth and jobs in the economy. Indeed, private sector borrowing has increased by only Rs26 billion compared to Rs61 billion in the same period a year ago, a stark reminder of how the government, or the public sector more generally, is pre-empting the bulk of the economy’s resources.

Technically speaking (and ignoring its consequences), borrowing in domestic currency is virtually limitless.

But alas, we cannot print foreign exchange to make up for external financing shortfalls. While those mysterious inflows that we call ‘workers’ remittance’ continue to flow into the economy unabated, exports are slowing sharply as the growth in export volume has not kept pace with, nor managed to offset falling prices. The SBP thinks that exports will fall in value terms this year by as much as five per cent. More worryingly, imports continue to grow strongly, largely driven by higher import prices since the level of domestic activity remains subdued. The current account deficit has surged, and reflecting the double blow of diminished/delayed capital inflows and rising external debt servicing payments, the financing gap is being ‘closed’ by depleting our foreign exchange reserves. These have already fallen by Rs125 billion, compared to a build-up of Rs76 billion in the same period last year — a swing of Rs201 billion.

The prospect of sharply diminished external inflows should have prompted consideration of immediate and forceful macroeconomic adjustment in order to safeguard the balance of payments — even if this compression in demand came at the cost of sacrificing some growth in the short-term. Instead, the government remains in denial and its economic dream team has proven once again — if further proof was needed — that they are incompetent, ineffectual and/or malevolent. If tax revenues are up by 28 per cent and spending is being contained as they claim, what is the Rs668 billion of bank borrowing financing? Once the excess demand from the domestic side ‘spills’ over into the external side via higher imports and inflation takes-off, the economy will be pushed into the face of another balance of payments crisis with all its attendant chaotic and destabilising consequences.

(Kamran Shafi’s Friday column will appear tomorrow)

Published in The Express Tribune, December 23rd, 2011.

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Reader Comments (14)

  • Max
    Dec 23, 2011 - 2:18AM

    You argument/s well taken though the scenario that you present is very scary. But not your fault. Facts are facts and someone has to speak the truth. Pakistan cannot blame anyone but itself. It is a self-inflicted wound and policy makers knew it from the very begining. There is still time to restructure the tax regime and get back to IMF, otherwise consequences will be very severe. The unfortunate part is that the average person will end up paying the price. Again thank you for an honest analysis.


  • Cautious
    Dec 23, 2011 - 6:41AM

    Nice article — paints a rather depressing but accurate picture. The cost of energy is rising and the value of your primary exports are falling — a bad combo. Toss in an international depression and a fallout with the USA which has been your primary supporter (and still your largest export market) and things look grim.


  • Harry Stone
    Dec 23, 2011 - 8:11AM

    Who would want to either invest or donate money to PAK? PAK is unfortunately a failed state.


  • Zalim singh
    Dec 23, 2011 - 8:55AM

    Dear Sir

    I feel India and Pakistan should join hands and come out of this crisis together, with heads held high. i guess it is the only way out.


  • gp65
    Dec 23, 2011 - 9:49AM

    Meekal saab it looks like WOrld Bank is going to give Pakistan 5.5 billion without the letter of comfort. http://tribune.com.pk/story/310881/world-bank-sets-5-5-billion-in-aid-for-pakistan/

    Would like your take on why that happened.


  • Syed M. Ali
    Dec 23, 2011 - 10:46AM

    Great contextualization of US aid and its potential role in overall financing needs of Pakistan at present.


  • Nand
    Dec 23, 2011 - 11:34AM

    @Max: ‘get back to IMF’. IMF will no give a single dollar without the approval of USA. Any guess why?


  • Parvez
    Dec 23, 2011 - 1:19PM

    Liked the way you wrote this so that ‘the man on the street’ can understand as well.
    Form the ‘man-on-the-street’s’ perspective this scenario has been played out many a time and incompetent though our financial managers may be, they are experts at skating on thin ice. The question is when will their luck run out ?


  • John
    Dec 23, 2011 - 2:15PM

    @Zalim singh…

    I think it should be “India must give its hands to lift pakistan” and not join hands… Why do you keep associating pakistan with india?


  • Meekal Ahmed
    Dec 23, 2011 - 5:30PM


    They have announced their lending program for the next two years. Nothing terribly weird about that. Of course it is all project related whereas Pakistan needs quick-disbursing money to support the budget and the balance of payments.


  • gp65
    Dec 23, 2011 - 9:23PM

    @Meekal Ahmed:
    Thank you that is helpful.


  • hedgefunder
    Dec 23, 2011 - 9:24PM

    @Meekal Ahmed:
    Sir, once again a very well thought out article from you.
    As you mentioned the proof is in the pudding, with LOC, there is no chance of funding from any major institutions without one, sadly the politicians really lack the ability or vision to tackle the most important financial and fiscal issues facing the country !!!
    In regards to US Aid, you could not have been more honest, if only your fellow countrymen had same grasp of the situation as you then, perhaps they would have been more aware of their current state of affairs, rather than going on denials or blame games !!!!
    Its going to be very testing 2012 for Pakistan on all fronts, economically and politically too !


  • Maverick
    Dec 26, 2011 - 10:34PM

    Amazing that you can still find the exclamation key on your key board.- I would have thought it would have disappeared by now, with your incessant anti-Pakistan rants! Tedious and boring as usual…………..not to mention predictable. I thought ET had expunged your remarks but somehow, you seem to have come out of the wood works again!


  • hedgefunder
    Dec 26, 2011 - 11:46PM

    Why don’t you stick the subjrct ??
    So you have probllem facing the facts ???
    As to my welfare its least of your concerns, and you certainly are not a shareholder or owner of publication, as rest assure i would not bother to read your trash !!!
    Hope you had a good christmas and may you have illusional new year too !!!


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