By Shahid Javed Burki
PAKISTAN’S new political masters are now convinced that urgent action is required to secure the funds needed to keep the country afloat.
The country’s own resources will not take it much beyond the early months of 2009. Perhaps by the spring of next year, foreign exchange reserves maintained by the State Bank of Pakistan will have run down to a level that will not be sufficient to cover the trade deficit and also service the country’s foreign obligations.
The rate of depletion may be reduced somewhat by a slowdown in the rate of economic growth and by the consequent decline in the quantum of imports. Some of the measures adopted by the new government may also reduce imports. The sharp correction in the exchange rate may also increase exports and contribute to narrowing the trade gap. If that were to happen the pressure on foreign exchange reserves will be eased somewhat.
The sharp decline in the price of oil will also help the balance of payments. On Oct 16 the price of a barrel of oil fell below $70 for the first time in a year. Given the amount of money Pakistan spends on importing oil, this too will reduce the import bill and help with the balance of payments situation.
However, some other elements in the country’s external account may move in the opposite direction and contribute to a further deterioration in the situation. I am thinking in particular about private capital flows to Pakistan from the United States and Britain. An important component of this is normally called ‘workers’ remittances’. This is a misnomer since a large proportion of these amounts are sent by the relatively affluent members of the Pakistani diaspora who, after years of work outside the country, have accumulated significant savings. These are available for investments.
Most diasporas behave in the same way. They normally start with charitable contributions to the people they have left behind in the homeland. Once their situation improves, they begin making investments for the long term. Some of this goes to the homeland. This is where the Pakistani diaspora is in the United States and Britain.
For the last several years, the Pakistani diaspora has used its savings for investment in the Karachi stock market, or to buy real estate or to set up small enterprises all over the country. This source of money may dry up if the economic situation in Pakistan continues to deteriorate. It will also dry up if the current economic difficulties in Britain and the United States negatively affect the Pakistani diaspora. In other words, Pakistan’s policymakers should be cautious about banking on this resource for paying the country’s bills. My guess is that if the US goes into a deep recession, which seems increasingly likely, remittances by US-based Pakistanis may decline by one half to only $1bn.
There is growing apprehension in the financial community about Pakistan’s economic future. I was contacted recently by a major investment fund based in the United States that took a large position in the Pakistani government bond due for repayment in early 2009. The question was whether Pakistan would honour its obligation when the term for the bond is over. I assured the fund that it was unlikely that Pakistan would reach the situation at which it may have to default. A way will be found to continue to meet external obligations.
From Pakistan’s perspective its economic crisis couldn’t have come at a more awkward time. Pakistan’s need for the infusion of foreign capital continues to increase while the world is in economic turmoil. Developed countries are totally absorbed in dealing with the meltdown in their own financial sectors. In spite of the enormous amount of commitment of public funds for the rescue of various parts of the financial system, the crisis is not letting up. The US capital markets are in free fall and the amount of money the government is providing for stabilising them is building up government debt. The budget is under enormous pressure and the fiscal deficit is increasing.
Given these developments would Washington have the resources to rescue Pakistan from its precarious situation? Or would any other developed nation with interest in preserving Pakistan’s economic integrity come to the country’s rescue when it too is dealing with a severe economic crisis of its own?
If the western nations are too preoccupied with their own problems and may not have either the time or the resources to focus on Pakistan’s worsening plight, could the country turn to some of the cash-rich states such as the Middle Eastern oil exporters or China? President Asif Ali Zardari paid a state visit to China in the middle of October. Receiving help from China must have been high on his agenda. He must have asked for cash — a deposit of a large amount of money into Pakistan’s account at the Federal Reserve Bank in New York.
This is the kind of help I received from Beijing in December 1996 when Pakistan’s economic situation was even more precarious than it is at present. Foreign exchange reserves had run down to only $342m. Default on repayments to the World Bank and the IMF would have been the only option left for the country had the Chinese not heeded our plea.
The Chinese help arrived within a day of my visit to Beijing. But in the conversation I had with Zhu Rongji, then prime minister of China, it was impressed upon me that the country had to learn to stand on its feet. This implied a serious effort to increase the domestic savings rate including savings by the government. Prime Minister Zhu knew of my work on China, a country I had looked after for the World Bank for seven years. He reminded me that since China saved 40 per cent of its gross domestic product, it was able to ride over many storms.
His assessment that a low savings rate was the Achilles heel of the Pakistani economy was totally correct. In the 12-year period since that help was received from the Chinese, Pakistan’s savings rate has declined and the government’s deficit has increased. The country went in the direction exactly opposite to the one advocated by China. Beijing had demonstrated by its own economic management that savings was the right course to adopt.
I am not confident that China will provide a great deal of help. The only way out is to go to a dozen potential donors with a well-developed programme for reform.
Source: Daily Dawn, 21/10/2008