Pakistan Economy under severe stress

By Khaleeq Kiani

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.

Source: Daily Dawn, 8/9/2008

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