Money Matters

Appropriate restructuring

June 19, 2017
By Ihtasham Ul Haque

INSIGHT

With the passage of 2017-18 federal budget sans the participation of the opposition, perplexing issues are confronting the government that could gravely hurt the struggling economy if timely actions are not taken under a new strategy.

By Mach 2018, the crisis would deepen because of losing $6 billion as the central bank’s reserves would have gone down from $18 billion to $12 billion by that time. So far the reduction of $3.5 billion in reserves is being seen a big jolt. By May 17, the government desperately borrowed $1 billion from China and is further negotiating with Asian Development Bank (ADB) to acquire $600 million by June 30 this year.

The government has already borrowed $3.5 billion from the commercial banks for three months to stabilise its dwindling reserves. Due to unchecked reckless borrowing, external debt is feared to reach $80 billion next year up from $73 billion. Moody’s International Services, a New York based credit rating agency, believes that Pakistan’s total foreign debt is set to increase to $79 billion by June this year. Many believe it would further jump to $90 billion by the end of 2107-18. 

According to renowned economist Dr Ashfaque Hasan Khan the government needs $22 billion to meet its financial requirements. “There is going to be financing gap of $12.5 to $13 billion in 2017-18 and if we add up the amount of $8.5 billion debt servicing in it, the amount goes to $21.5 billion plus. The government is expecting close to $11.5 billion from traditional sources including China, WB, ADB etc, and the FDI, but still the financing gap would remain close to $10 billion and the million dollar question is from where the money will come except by knocking the doors of the IMF for emergency lending. I am seeing Pakistan facing a serious balance of payment problem sometime in March and April of 2018,” Dr Khan warned.

Latest official estimates reveal that the 16-year war on terror has brought $120 billion loss to the national economy. These losses are multiplying with time due to continuous instability in the region with planners and strategists having no clue how to stop this haemorrhaging to the national kitty.

And now external scenario is getting murkier with burgeoning trade deficit of $30 billion seen during the first 11 months of the outgoing financial year.

The current account deficit during this period has ballooned to $8.2 billion against the estimates of $2.5 billion. Foreign exchange reserves have dropped by $3.51 billion since October 2016 to $20.52 billion by June 2, 2017. Reserves held by the central bank went down by $3.22 billion to $15.7 billion which amply shows that the government would face difficulties in keeping the exchange rate unchanged around the current level. These reserves are only enough for five weeks of imports.

The government may soon have to depreciate the rupee as is being urged by independent economists and the exporters. How would the government fill the widening gap in the current account deficit? The situation is turning scarier on the face of declining home remittances as the government is unlikely to achieve its annual target of $20 billion by June 30 this year.

In the event of gradual decline in foreign exchange reserves, home remittances and exports- important tools to help build these reserves, exchange rate stability is key to adequately look after the external front which is suffering setbacks due to cut in the Coalition Support Fund (CSF) of the United States. At the start of 2015-2016, exchange rate difference of USD between kerb market and interbank was Rs0.51. Observing a gradual rise in the demand of USD in the local market and increase in exchange rate difference between kerb and interbank markets from Rs0.51 to Rs1.79, SBP took measures including allowing interbank payments for Hajj-related activities and introducing electronic import form to reduce dependence of hajj and import related payments on kerb market/Hawala. Further strict regulatory and law enforcement actions were also initiated against exchange companies. This helped stabilise the exchange rate and reduced the difference of USD between kerb market and interbank.

Now, when the government is caught in a very serious situation on the external front, independent economists are intrigued why are the home remittances declining and why no solution could be found despite the fact that they are lifeline for improving the country’s foreign exchange reserves?

It is generally feared that the current account deficit would further worsen if the annual target of $20 billion home remittances is not met by June 30 this year. The obvious question, however, is why is the government failing to approach the Middle Eastern countries, especially of the Gulf region, to increase manpower export from Pakistan besides ensuring that most of these remittances come through banking channels instead of infamous hundi and hawala.

According to the latest data released by the central bank, overseas Pakistanis remitted $17.46 billion in the first eleven months (July-May) of 2016-17 compared with $17.84 billion in the corresponding period of last year, showing a fall of 2 percent. Workers’ remittances from the US fell by 3.22 percent to $2.18 billion compared to $2.25 billion in the same period last year, while inflows from UK went down by 8.13 percent to $2.18 compared to $2.25 billion in the same period last year.

Remittances from Saudi Arabia came down from $5.39 billion last year to $5.03 billion denoting a fall of 6.57 percent. Similarly, remittances from other countries including UAE, also fell; however, government officials expect a better situation in Ramazan and Eid-ul-Fitr.     

One of the major reasons in the decline of home remittances is the difference between the market rate and interbank rate of dollar which needs to be equalised or balanced to some extent so that overseas Pakistanis opt for sending their money through banking channels instead of hundi and hawala.

What is the way forward to shore up reserves? These reserves provide funds in foreign currencies for servicing external debt and liabilities for which adequate foreign currency is needed at the time when debt servicing payments fall due to avoid a default. Who does not know that a high level of reserves provides implicit guarantee to the creditors that the country will be able to meet its obligation on time. The question, nonetheless, is whether Pakistan is increasing its reserves by having increased FDI and through more and more exports and by curtailing unnecessary imports which have now doubled. The obvious answer is no and hence the government after government went for increased external borrowing and thus ballooning foreign debt.          

The government and its planners need to work out an alternate strategy to lure FDI especially by creating a competitive environment for the investors. Also domestic economy has to be improved as reserves accumulation cannot be used as a defence against external vulnerability. This requires governance reforms and structural reforms in the key sectors which the incumbent government finds hard to do since it has only been fighting the war of survival for the last four years.

The writer is a senior journalist based in Islamabad