LAST month, Moody’s Investors Service (MIS) downgraded Pakistan’s rating to negative from stable. It stated that the decision to change the outlook to negative was driven by heightened external vulnerability risk, as ongoing balance of payment pressures erode foreign exchange buffers. It said that the foreign exchange reserves have fallen to low levels hardly enough for two months imports. In March 2018, International Monetary Fund (IMF) had released the report about Pakistan economic indicators, depicting that all was not well on economic front as boasted by the then government. In fact, the outgoing government could not achieve any of the targets vis-à-vis fiscal deficit, trade deficit and current account deficit, which means that more loans would have to be taken to address those deficits and also to pay back old loans. There appears to be no way out but to approach the IMF.
Pakistan is already in the grip of foreign debt to the extent of $80 billion, and despite the rescheduling of the debt or taking new loans to pay back the old loans, one day these loans have to be paid. Thus Pakistan would find itself in the vicious circle, as IMF would ask to increase gas and electricity charges to the detriment of consumers. It is true that new energy projects have helped in reducing load shedding to some extent, but due to lack of transparency the cost of electricity is prohibitive. It means that Pakistan would not be able to compete with India and Bangladesh as their gas and electricity tariffs are 40 per cent less as compared with Pakistan. To add to its woes, Pakistan devalued its currency by 18 per cent during the last six months because of the pressure on external sector.
By taking more loans, there would be a phenomenal increase in debt servicing and as a result increase in fiscal deficit. To avert the economic disaster, the government must show zero-tolerance to corruption, tax evasion, wastage and mismanagement in public sector enterprises. It should learn to live within its means; reduce the non-development expenditure and curtail perks and privileges of cabinet members and parliamentarians. As regards trade deficit i.e. excess of imports over exports, our industrialists and exporters are handicapped because of higher input costs like electricity and gas charges. The government should therefore reduce the gas and electricity charges to reduce cost of production. On their part, the trade and industry should resort to aggressive and innovative marketing policies to enhance exports; look for non-traditional markets and try to increase the exports of value-added products to reduce the trade deficit.
Unfortunately, the IMF does not give suggestions or pieces of advice that really matter. For example, there seems to be no pressure by the IMF to immediately bring agriculture sector into the tax loop, perhaps because majority of the parliamentarians belong to landed aristocracy. Some industrialists have also gone into agricultural sector to take advantage of exemption on agricultural income who use it to convert black money into white money. But income of majority of Pakistanis has been eroded due to food inflation because the daily income of majority of the people is less than 2 dollars a day. The richest segments of the society spend 10 to 15 per cent of their income on food, while middle-class spends 30 to 40 per cent in the same category, poor segments spend 70 to 80 per cent of their income on food.
The increase in the non-food inflation is mainly due to increase in oil prices in the past few months and the combined impact of the depreciation of the Pak Rupee and hike of crude oil prices in world market which is being passed on to the consumers. During this period the fuel prices in international market increased from $48.7 per barrel in July 2017 to $79 in June 2018, an increase of 62 pc. It has o be mentioned that in the past, people were not given benefit of lower prices of oil in world market. In a country like Pakistan, most governments in the past were tempted to obtain resources by printing money or creating credit, because of political resistance, which they encounter if they raise taxes instead. However, an increase in supply of money would not have raised prices if it was limited to matching an increase in output.
The situation at present is that Pakistan’s economy is in a shambles because of the flawed policies of various governments in the past. Even the outgoing government did not give due importance to overcome the crisis and the economic challenges vis-à-vis trade and current account and fiscal deficits. In Pakistan with stagnant economy only a small amount of Foreign Direct Investment is coming either in the form of portfolio investment or in privatisation process. New industries were not established to increase production, which could keep general price level in check to save the common man from the effects of runaway inflation. Production and productive activity and saving of any excess income is what builds real hard earned capital. In the absence of an increase in productive activity, how are the loans going to be repaid? That is a sure way towards financial bankruptcy. But the government has a way out of that one too. Issue more loans to repay the existing loans; but that is the way to moral bankruptcy.
—The writer is a senior journalist based in Lahore.