With the GDP growth rate slowing down and foreign debts piling up in 2018-19, managing the external sector in the next fiscal year will require real grit.
The National Economic Council (NEC) has estimated the GDP growth rate for 2018-19 at 3.3 per cent, way down from the revised growth rate of 5.2pc for 2017-18. This slowdown is largely because of the slackening in agricultural and industrial sectors. It is one big reason for stagnant exports.
For 2019-20, the NEC has set the overall GDP growth target of 4pc. Agriculture and industry are projected to grow 3.5pc and 2.2pc, respectively. But even if these two productive sectors grow at their projected rates, boosting export earnings will not be a walk in the park. Ten-month merchandise exports have remained stagnant at less than $19.2 billion. Full-year exports look set to rise to $23bn.
Pakistan’s ability to meet external-sector obligations without falling into a debt trap will be tested harshly in 2019-20
Ten-month merchandise imports have consumed about $45.5bn while full-year imports may reach $54bn. So we are heading towards a $32bn trade deficit in 2018-19. It cannot be expected to fall substantially in 2019-20 when a higher targeted economic growth rate will necessitate more imports. Historically, higher GDP readings have not led to substantially high exports in Pakistan.
Ten-month remittances were $17.9bn and full-year inflows in 2018-19 may rise to $22bn even in the best-case scenario.
Combine export earnings and remittances, and you still have a $9bn trade deficit to fill in from other sources. Can we expect this picture to change drastically in 2019-20?
The global economy is showing signs of weaker growth, the Middle East is in deep political turmoil with Iran and Saudi Arabia challenging each other, and our internal political environment is getting overly charged.
How Pakistan maintains a neutral position in the escalating US-Iran conflict in the Persian Gulf and the growing Iran-Saudi Arabia confrontation will have consequences for its economy. Boosting exports worldwide, attracting more foreign investment from the United States and Europe and ensuring the continuation of thicker flows of remittances from the west and the Gulf region will require us to make tough policy choices and painful trade-offs.
Is that possible under our present political environment? Your guess is as good as mine. The national cohesion and inclusiveness that is a must for dealing with such grim challenges seem missing though.
The energy cost already went up during this fiscal year. It can be expected to remain even higher in the next year. Oil prices soar amid a growing conflict in the Middle East. The withdrawal of subsidies by the resource-starved government can even mitigate the impact of the activation of a three-year oil deferred payment facility of $3bn-plus from Saudi Arabia effective from July 1.
The central bank’s policy rate is already 12.25pc, up 6.25 percentage points from a year ago. Further monetary tightening is expected in 2019-20 to curb inflationary pressures arising out of higher oil prices and a weaker rupee.
Despite some nominal gains in the interbank market in recent days, the rupee is still vulnerable to further depreciation in the wake of persisting imbalances in the external account, availability of just $8bn foreign exchange reserves with the central bank (as of May 24) and the insistence by the International Monetary Fund (IMF) to make the exchange rate freer from the central bank’s interventions.
So the input cost of export-oriented industries may remain high in the next fiscal year owing to higher energy prices, weaker rupee and limited growth prospects.
The current fiscal year is set to see a reduced current account deficit. In the first 10 months of the fiscal year, it has already shrunk to $11.6bn from $15.6bn in the year-ago period. But in 2019-20, managing even a reduced deficit can be difficult with the external debt servicing growing and the need for augmenting foreign exchange reserves becoming more pressing owing to the challenges to peace and stability in the Middle East.
The government says the final approval of a $6bn IMF loan sometime this month should enable us to borrow from the World Bank, Asian Development Bank and other multilateral lending agencies.
The IMF loan should also help us launch sovereign bonds and attract even larger foreign direct investment. But these assumptions don’t take into account the unfolding geopolitical developments and growing tensions in domestic politics taking a toll on the performance of the federal and provincial governments.
Since the IMF loan will be available in 13 quarterly payments, subject to regular reviews by the lender, Islamabad’s position in regional affairs will inevitably affect its quarterly performance.
And that will give the IMF reason to approve or delay the next quarterly tranche.
Whether we can borrow from other multilateral lending agencies will also be subject to how these institutions view our economic strengths and weaknesses and, to some extent, our position in the geopolitical landscape. No amount of foreign exchange will come in automatically and as fast as our own requirements dictate.
In 2019-20, Pakistan’s ability to meet external-sector obligations without falling into a debt trap will be tested harshly. In 2018-19, we got about $9bn from Saudi Arabia, China and the United Arab Emirates just to continue to foot the import bill and make external debt payments.
In 2019-20, our reliance on the IMF and these friendly countries will be for the same purpose. So the real issue is that we have accumulated too much external debt and have conveniently ignored for years a huge build-up in the import bill.
In 2018-19, external debt servicing is set to consume $9bn — it has already eaten up $7.23bn in the first nine months of the year. The amount can grow in 2019-20 as total external debt and liabilities swelled to $105.84bn in March from $92.29bn a year ago.
External-sector issues are really grave — and they need sober and adroit handling. Let’s hope for the better.
Published in Dawn, The Business and Finance Weekly, June 3rd, 2019