Pakistan suffers from a chronic current account deficit whereby dollar outflows from imports materially exceed the dollar inflows via exports, remittances and foreign direct investment.
The country registered a mammoth current account deficit of roughly $21 billion in 2021-22 as the international prices of crude oil have increased significantly. The current account imbalance has been further aggravated by the sizeable mountain of foreign public debt worth about $90bn as of March 2022, resulting in an annual $20bn in foreign public debt interest and principal servicing requirements.
The country has approximately a $40bn dollar financing requirement for 2022-23 (recurring current account deficit and about $20bn in foreign public debt interest & principal servicing) compared to the State Bank of Pakistan’s meagre reserves of $8.4bn as of July 29. The precarious current account outlook is the primary driver of rupee weakness against the dollar.
It is perplexing to see the celebrations by economic czars in Pakistan when the country gets dollar loans and deposits from international institutions and friendly countries. Any borrowed dollars need to be repaid along with accrued interest in dollars at a later stage. Hence, the country ends up borrowing more dollars to service both interest and principal amounts of the existing foreign public debt in addition to a recurring sizeable current account deficit.
It is perplexing to see the celebrations by economic czars when the country gets dollar loans and deposits from international institutions and friendly countries since any borrowed dollars need to be repaid along with accrued interest
Below are a few avenues highlighted to control the external current account deficit over the next 3-5 years period.
The cost of doodh-patti
The government of Pakistan supplies heavily subsidised natural gas to about 10 million or approximately 30 per cent of households in Pakistan for domestic use. Imagine the value of gas (at prevailing international prices) used at homes to boil water to make doodh-patti chai.
The domestic natural gas reserves represent Pakistan’s competitive advantage in global trade and should be used for industrial use such as fertiliser and textile. As part of a multiple-year plan, the government should introduce electricity-based cooking hobs in the country and wholly divert domestic gas for industrial use or exports.
The domestic gas consumption is greater than the imported regasified liquefied natural gas (RLNG) volume worth $3.4bn in 2020-21. The diversion of gas away from domestic use to the industrial sector will eliminate RLNG imports, lower the industrial base production cost (no cross-subsidisation of domestic use needed) and reduce the gas line losses (leakages, theft) as Sui Southern Gas Company and Sui Northern Gas Company Ltd will focus on maintaining a smaller dedicated industrial gas network (versus ubiquitous domestic gas transmission system).
The existing long-term RLNG import contracts are significant “in-the-money” (contracted rates are materially below the prevailing spot rates) and could be renegotiated to provide a significant foreign exchange windfall to the Pakistani State.
A case for patience
Oil and Gas Development Company Limited (OGDC) and Pakistan Petroleum Limited (PPL) are the two most profitable state-owned enterprises (SOEs). These SOEs have zero gross debt on the balance sheet with sizeable financial assets and cash (Rs223bn for OGDC and Rs92bn for PPL) and trade receivables (Rs442bn for OGDC and Rs346bn for PPL) as of March 2022.
Typically, the balance sheet of upstream energy players like BP and Shell are heavily levered (indebted) because of their highly stable cashflows. OGDC and PPL have financial means via a strong balance sheet and scope for leverage to pursue aggressive onshore and offshore oil & gas exploration activities like what Turkey has accomplished in the Black Sea via the Sakarya field discovery.
Arabian Sea has been largely unexplored by OGDC and PPL despite India finding sizeable offshore energy reserves in Gujrat. This is a long-term strategy which would require patience and luck.
Energy security is as paramount as water or border security for Pakistan, and energy imports represented $3.6bn or about 45pc of June’s total imports. OGDC and PPL capital expenditure was only Rs19bn and Rs14bn in 2020-21 respectively despite significant liquidity on the balance sheet and scope for leverage.
The scope of railways
Pakistani urban cities severely lack integrated public transport networks. Replacing costly imported-fuel private transport with public transport will help control petroleum import volume as well as environmental degeneration.
Imagine the impact on ease and cost of doing business if the truck fleet used to transport containers from GT Road to Karachi Port is replaced by Pakistan Railways. World economies in the present day are introducing railway networks to facilitate business activities in their respective countries while Pakistan have a nationwide railway network since its independence. ML-1 and urban transit projects should be prioritised to reduce the imported fuel volume.
The irony of import-based electricity
A major portion of installed electricity capacity is based on imported fuel. For example, the electricity generation capacity from coal in Pakistan is 5,280MW of which 75pc is imported coal-based.
It is an irony if one considers that Pakistan has one of the largest coal reserves in Thar and the mighty Indus with rugged terrain in the north is ideal for hydroelectricity generation. Pakistan must rapidly shift to indigenous inexpensive fuel sources (eg Thar coal, natural gas).
The persistent current account deficit has resulted in a progressively weaker rupee against the dollar which has been the primary reason for inflationary pressure in Pakistan.
In 2021-22, Pakistan imported $90bn worth of goods and services which equates to about 25pc of GDP ie every Rs2.5 out of Rs10 spent by Pakistanis is on imported goods and services. Fixing the current account deficit on a sustainable basis will help mitigate the inflation in the country with a corresponding lower interest rate to promote investment.
To summarise, Pakistan will remain permanently wedded to the International Monetary Fund and friendly countries’ support unless we structurally fix our current account deficit to surplus. Thereafter, we have to use the excess dollars inflow from the current account surplus to repay the mountain of dollar-denominated foreign public debt worth $90bn (as of March 2022) over time.
The author works as a director at an investment bank in London
Published in Dawn, The Business and Finance Weekly, August 8th, 2022