Pakistan’s economy in 2019 faced many challenges like trade, current account and budget deficits, increase in electricity and gas prices, high inflation and political situation of the country. Trade deficit is continuously increasing; government is trying to control this as well by taking various measures.
In 2019, government took various steps in improving the economy. Government is trying to control its expenditures, Pak rupee is stable now after massive depreciation, stock market is improving as well, foreign exchange reserves of the state bank are increasing, the World Bank has included Pakistan in top 10 countries of the world where serious steps have been taken for ease of doing business, tax collection of FBR has increased by 15-16 percent, documentation of economy is being done, federal contribution to the provincial governments has also increased, and new measures are being taken to improve the business environment. Pakistan stock exchange is recovering from a low of 28,670 points in August 2019 and has crossed the level of 42,000 in December. Mutual funds and foreign investors are now putting funds in the market due to better market performance. Foreign direct investment has also increased by 200 percent in last four months as compared to last year.
There is an increase in exports in 2019, this increase in exports and cut in imports would improve the trade balance position and ultimately the current account deficit (CAD) that has recently turned into surplus. Economists believe that with the increase in the surpluses in CAD, the country’s foreign exchange reserves will also get improved. It is worth mentioning that for the first time in the last four years, the country’s current account turned into surplus and was recorded at net positive current account balance of USD 99 million in October 2019. Pakistan’s current account deficit in FY19 stood at USD 12.75 billion, a 36 percent reduction from USD 19.9 billion in FY18.
Second phase of China-Pakistan Free Trade Agreement (CPFTA) has also come into the effect from December 2019. This will help exporting additional 313 new Pakistani products at zero duty to the Chinese market. Currently there are over 724 items, which Pakistan exports to China under zero percent duty regime and after the second phase, additional 300 items will also be added in the list of zero percent duty. It is being said that it will help the textile, leather, agriculture products, confectionery and biscuits, etc.
Present Government has taken record loans in the history of Pakistan while it remained critical on loans taken by the previous governments when it was in opposition. Present Government took loan of over USD 15.9 billion whereas it has repaid loan of over USD 9.1 billion from August 2018 to September 2019. As a matter of fact, every country takes loans and in fact there is no harm in taking loan unless it is wrongly used. Before commenting on the financing strategy of the government, it is important to see where the loan is being spent, if loan is taken for the development and construction of an infrastructure project where loan installments are paid from the revenues of that infrastructure project then there is no harm is taking such a loan. But if loan is taken to fund the administrative expenditures then it will only increase the burden of the government.
High rate of food inflation remained a key issue in 2019 and government has also accepted its uncontrollability. Food inflation rate was the highest in October, which was even higher in last five years. We all know that Pakistan has agriculture based economy yet people have to buy tomatoes at Rs. 200 per kilo. Now we are told that tomatoes were being imported from India and due to restricted trade with India, there is a shortfall of tomatoes in the country. Food inflation is in double digits for the last several months. A finance ministry report says that increase in food inflation in 2019 is due to an extraordinary surge in demand, particularly for fruit, vegetables, milk, meat, poultry and cooking oil. A sharp rise was also witnessed in wheat and flour prices, driven by extra-market forces. Although, the prices of wheat and flour declined lately, their contribution to inflation was already realized. Food inflation is always a major source of concern for the policy-makers everywhere including Pakistan. While major sources of inflation can be external but there are certain internal factors too which aggravates the inflation in the country. Government should take measures to control the prices and should have better price management system.
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Pakistan has record budget deficit this year and it has to take loans to fund the budget deficit. It is estimated that budget deficit in current fiscal year would be even higher than the last year despite having an IMF program. It is being said that Pakistan is now in the debt trap. Last IMF program was to address budget deficit whereas current IMF program is for primary deficit. Primary deficit means total expenditure of the government less payment of interest on loans taken by the government. The important factor is not the loan itself but the loan to GDP ratio. Every country takes loans to fund its expenditures therefore, it might not be a bad move by the government if it has taken record loans in 2019.
Interest rate is one key factor which needs to be evaluated carefully before taking loan and its utilization. In developed economies, Interest rate is kept lower than the real growth rate. Pakistan’s real GDP rate is around 2.5 percent whereas real interest rate is 5.75 percent. This alone factor is distorting the loan to GDP ratio. Presently, interest rates are 13.25 percent whereas core inflation is 7.5 percent in Pakistan, most of the independent economists say that interest rate should be even less than 7.5 percent. Due to high interest rates, local businesses are facing numerous challenges. It has even become a threat for the businesses and there is a high likelihood that businesses will shut down as they cannot survive at this level of high interest rates. It is estimated that Pakistan can save over Rs. 1 trillion in payment of interest on loans if government brings down the interest rates. Government is paying high profits to foreign investors and banks as it is getting hot money from foreign investors. On other side, government is of the view that a lot of people deposit their surplus funds in national saving schemes whereas profits in those schemes are linked with the interest rate of the country therefore, keeping interest rates at a higher level is basically giving relief to the poor people having national saving certificates. In present day, it is not difficult to calculate the exact impact of interest rate on saving schemes and on business community. There should be cost benefit analysis before making such decisions and working should be shared with public.
Macro-economic situation is very delicate at this stage. Good thing is that current account deficit is not mounting mainly because of private sector, which is not getting its due credit. Current account deficit is the difference between internal income and internal expenditures which comes from two factors, public sector expenditures and private sector borrowings. The improvement we see in current account deficit is due to curb on imports rather than controlling the expenditures.
Moody’s has recently issued a report on Pakistan’s economy and has also upgraded credit rating of Pakistan from Negative to Positive. As per Moody’s estimate, Pakistan’s budget deficit would be around 8.6 percent instead of government estimate of 7.1 percent. Increase in budget deficit means that Pakistan will have to take additional loan of around Rs. 600 billion to fund its budget deficit. Moody’s has also projected annual growth rate of 2.9 percent against the government’s estimate of 3.5 percent. In addition, Moody’s has said in its report that Pakistan is a Non-Investment Grade country where investment is at high risk. These points are very serious and government should also focus on improving these areas.
Pakistan also needs to address fiscal deficit and it has to bring it down. It is important for the federal and all the four provincial governments to cut down their expenditures. Under 18th amendment, provinces get massive funds from the federal government whereas there is no check and balance on those spending as such. There is no harm in declaring an economic emergency in the country but for that we need to speak the truth instead of accusing others. Such accusations without any proof simply distract decision makers from the core issues.
Summing up, over all 2019 was full of economic turbulence which going forward seems to increase because fundamentals are not being addressed. Every time ordinary people have to suffer due to mistakes of the policy makers. Government is not an employment agency, it has to scale down government employees and should give support to the private sector for job creation. Small and Medium Enterprises is one area where government should focus on as enough was not done in 2019. In current situation, there is a risk that Pakistan’s loan to GDP ratio will further deteriorate, Pakistan will further slide into a debt trap and current account deficit will again emerge if government relaxes the imports without any increase in the exports. Resultantly, it will put pressure on the foreign exchange which is under control at this moment.