Pakistan’s debts and liabilities at dangerous point

Pakistan’s debts and liabilities at dangerous point

  • FDI must for the growth of failing power sector
  • The most adverse side of the inflation is not its rate, it is its patterns
  • Have to lean on remittances to control current account balance

Interview with Dr. Ayub Mehar, — a renowned economist

PAGE: Tell me something about yourself, please:

Dr. Ayub Mehar: I have been serving as ‘Economic Advisor’ of the Economic Cooperation Organization (ECO) Chamber of Commerce for 3 years and also ‘Director General’ in the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) for 7 years. I have completed and working on various research assignments for Asian Development Bank Institute Tokyo, including ‘Measuring Impacts and Financing Infrastructure Development’, ‘Economic Integration among CAREC Member Countries’, and ‘Environmental, Social, and Governance Investment: Opportunities and Risks for Asia’. Development Financing, Macroeconomic Policies, International Trade and Finance are areas of my interest.

I have completed several policy research studies on strategic issues including, ‘Bridge Financing and Fiscal Policies during COVID-19 Pandemic Crisis’, ‘Ineffectiveness of ESG Policies and Incentives: Impact of GSP Plus on Central and South Asian Countries’, ‘Infrastructure Development and Public Private Partnership: Measuring Impacts of Fiscal Policy in Pakistan’, ‘Economic Integration in CAREC Member Countries: Financing Economic Corridors and Sovereign Bonds Market’, ‘Infrastructure Development by Liberalizing Economic Policies: The Straight Path of Economic Prosperity’, ‘Financial Cooperation in South Asia: Recent Development and Challenges’, and ‘FDI, Infrastructure Development and CPEC: Is There a Connection?’ for various national and international institutions including World Bank, Asian Development Bank Institute, Friedrich Naumann Stiftung (Fur Die Freiheit), SAARC Chamber of Commerce and Industry, and ECO Chamber of Commerce and Industry.

The Technology Policy and Assessment Center at Georgia Institute of Technology acknowledged my membership in the distinguished panel of international experts for Indicators of Technology-based Competitiveness, which is a project of the US National Science Foundation, United States Government.

I am also alumni of the IAL Gummerbach Germany, where I got training in Public Finance. Recently, I have completed a study on “COVID-19, Digital Transactions and Economic Activities: Puzzling Nexus of Wealth Enhancement, Trade and Financial Technology” for a project on “Fintech and Covid19” jointly launched by Asian Development Bank Institute Tokyo and Cambridge Center for Alternative Finance at the University of Cambridge.

Currently, I am associated as ‘Economic Advisor’ with the Employers’ Federation of Pakistan and serving as ‘Professor’ in Iqra University Karachi.

PAGE: How would you comment on the external debts and liabilities?

Dr. Ayub Mehar: Before reply this question I want to say that economic issues are usually discussed in public domains including print, electronic and social media based on the party politics. The supporters of ruling parties always justify the policies and actions of the ruling party while supporters of opposition parties argue against the actions taken by the ruling party. Unfortunately in majority of cases their arguments, data and interpretations mislead the common peoples. In case of outstanding debts, inflation and economic growth the peoples consider their leaders’ point of view.

According to the official sources, the total debt and liabilities of the Government of Pakistan have arrived at more than 90 percent of GDP, which is a dangerous point. The borrowing was accelerated during the last 3 years. Strangely, in the federal budget 2021-22, the government has decided to borrow 1.2 trillion rupees from external sources. It includes bilateral and multilateral loans and borrowing through bonds in international markets at higher rate of interest. Similarly, 2.5 trillion rupees will be financed by domestic borrowing which includes 2.4 trillion from commercial banks. It is just utilization of saving to finance the fiscal debt which ultimately hamper the investment in private sector. The loan from International Monetary Fund (IMF) is not included in these financing. Now, in the presence of historical high level of outstanding debt and more than 9 percent fiscal deficit to GDP ratio, the government cannot afford further borrowing or cost of interest on additional debts.

Naturally, to discharge the debt liabilities, government has to arrange more foreign exchange and have to collect more taxes. While, further increase in tax collection in the present scenario will damage industry and business activities. The more important point is not the magnitude of debt, it is the composition of debt.

At present, 35 percent of total debt is external while more than 98% of external debt is long-term debt. Here I want to indicate the ‘Debt Limitation and Fiscal Responsibility Act 2005’ restricts the fiscal deficit and limit the debt financing in Pakistan. This law was legislated in 2005 and then amended twice by the parliament. Unfortunately, this act does not recommend the punishment for violation of this act or misuse of the borrowed money. This is one of the reason that this law was violated by every government.

PAGE: Your perspective on inflationary pressures and the ensuing ramifications:

Dr. Ayub Mehar: In this respect, it should be cleared that a misleading statement is circulating in the media is that Pakistan has become the 4th most expensive country in the world. This statement is based on the misleading interpretation of the statistics released by the Economist London. According to these statistics, the current rate of inflation in 52 percent in Argentina, 20 percent in Turkey, 10 percent in Brazil and 9 percent in Pakistan. First of all, there is a great difference between 1st one (52 percent) and 4th one (9 percent).

Moreover these are rate of inflation (percent change in price levels), not absolute price level. From absolute price level’s point of view Pakistan is at 30th level out of 126 countries. While India is more expensive than Pakistan

. However, I agree that prices should not be accelerated in Pakistan, it can badly damage the economy. The official sources including the State Bank of Pakistan have predicted that the surge in commodity prices will remain continue in future. The rate of inflation will be further accelerated because of accelerated prices in international market and depreciation of Pakistani rupees.

However, the most adverse side of the inflation is not its rate, it is its patterns. The current trends show that the rate of inflation for basic commodities (based on Sensitive Price Index –SPI) is much higher than common commodities (based on Consumer Price Index – CPI). It implies that inflation for poor class is much higher than inflation for middle class. It is against the historical trends in Pakistan.

In considering the present state of economy in Pakistan, the most important indicator is inflation. The CPI (Consumer Price Index) based inflation was 4.7 percent in 2018, 6.8 percent in 2019 and now it is going to cross 10 percent. The double-digit inflation rate will push the monetary authorities to increase the rate of interest which will further hamper the stock market, industrialization and other business activities. Notable, the inflation rate was recorded at 5.6 percent in January 2019, when it was started to increase. In August 2019, it had crossed the single digit limit and was recorded at 10.5 percent. It was 14.6 percent in January 2020, 12. 4 percent in February 2020, and 10.2 percent in March 2020. The SPI (Sensitive Price Index) based inflation was 3.8 percent in 2018, 7.8 percent in 2019 and 14.4 percent in 2020. The rate of inflation based on consumer price index (CPI) was 9.2 percent in October 2021, while 8.7 percent based on July-October 2021. However, the rate of inflation based on sensitive price index (SPI) was recorded at 15.2 percent in October 2021.

Strangely, it is noted that oil price in Pakistan was Rs.78 per liter when oil prices in international market were around 107 dollar per barrel. Now prices in international market are much lower (80 dollar per barrel), while in Pakistan petrol price is greater than Rs.146 per liter. In fact, it indicates the effect of depreciation in Pakistani rupee. The nature of present inflation in Pakistan is not ‘Demand-pull’, it is ‘Cost-push’. The demand pull phenomenon was possible only in the case of attractive rate of growth in GDP or personal income or growth in consumer financing. These phenomena have not been observed currently. There are three main causes of present inflation: Depreciation in Pakistani rupee which increased the prices of imported commodities including edible items, medicines, oil & its products and industrial raw materials. Second reason is the increase in commodity prices in international market, and third is heavy dependency of our taxation system on indirect taxes including GST. Naturally, to control international prices is not in the hand of our policy makers, but taxation policies and depreciation in local currency reflect the flaws in economic policy.

In recent past, the government has introduced the economic package for poor Pakistanis which involves Rs.120 billion to support 130 million peoples (or 20 million households). Such packages do not reduce poverty but can control the bad socioeconomic consequences of poverty. According to this package the federal government will provide 30 percent subsidy on 3 basic commodities: flour, ghee and pulses. Before this, government has already introduced housing loan schemes, ‘SME Assan Financing scheme’, interest free loans for Rs.500000 for businesses and ‘Kamyab Jawan Program’. All these schemes require financing and the source of financing is increase in public debt or further tax revenue. Both the options have inflationary impacts, which is quite obvious.

The sustainable solution to control the inflation is curtailing import bill through investment in import substitution industries and shifting from indirect to direct taxes. The measures which have been taken by the State Bank of Pakistan to control the inflation belong to demand-pull inflation. The State Bank has increased policy interest rate by 25 basis points and increased liquidity reserve ratio from 5 to 6 percent to discourage the consumer financing. To control imports, the State Bank had tightened domestic financing for vehicles and other types of consumer finance facilities, personal loans and credit cards. Under these policy measures, maximum duration for auto financing has been reduced from 7 to 5 years, for personal loan from 5 to 4 years. While maximum debt-burden ratio has also been reduced from 50 to 40 percent. Overall auto financing limits by one person is now Rs3 million, while minimum down payment has increased from 15 to 30 percent.

Similarly the Ministry of Industries has imposed 50 percent regulatory duty on import of electric vehicles of more than 50 KWH battery. Regulatory duty on Hybrid vehicles to be increased from 15 percent to 50 percent on 1501 cc to 1800 cc, regulatory duty on CBU to be increased from 15 percent to 50 percent. Similarly federal excise duty on locally manufactured cars of 1501cc and above to be enhance to 10 percent from 5 percent. All these steps are taken to control demand pull inflation, while no step has been taken to control cost push inflation. The most important improvement which has been publicized by the government is the growth in Large Scale Manufacturing (LSM).

However, increase in the production of large scale manufacturing, corporate profits and tax collection by the federal board of revenue in recent past do not match with the GDP growth. The increase in General Sales Tax (GST) and corporate profits absorb the inflationary impact. The profits and sales tax increase by increase in the prices of goods and services. Such increase does not comparable unless their values are not calculated on constant prices. The higher collection of GST indicates the higher consumption of goods and services, while higher consumption expenditures in the presence of lower growth in GDP indicate lower growth in savings which is a bad indicator for the future of economy.

PAGE: How would you comment on remittances?

Dr. Ayub Mehar: It is important that the current account surplus of around one billion dollars last year against deficit of 4.1 billion dollar in preceding year was mainly because of workers’ remittances. It does not reflect the improvement in exports or reduction in trade deficit. The imports of 54 billion dollars and exports of 26 billion dollars are transformed into 28 billion dollar trade deficit, however, 29 billion dollars of workers remittances improved our current account balance. Though it has been publicized at a large that Pakistan has achieved current account surplus; but first of all it must be understood that it is ‘Current Account Surplus’ not ‘Trade Surplus’. The basic reason of current account surplus in the recent past months is the inflows of workers’ remittances.

The remittances of expatriate Pakistanis have increased tremendously because of multiple reasons. One of the important but unfortunately adverse reason is the returning of Pakistani workers from Middle East and some other countries after closures or shrinking of some business activities due to spread of COVID-19 pandemic. Those workers have transferred their deposits to Pakistan. A declining trend in trade deficit was also observed during the current fiscal year but this declining in trade deficit is not due to enhancement in exports.

The growth in exports was a temporary phenomenon which reflect the increase in exports from Pakistan to fill the gap of those backlogs which have been created during the peak of pandemic crisis. The closure of textile business activities in India, Indonesia, Malaysia and Bangladesh have shifted the imports orders of textile and clothing goods to Europe from Pakistan. Neither this increase in textile products was sustainable nor its magnitude much higher to support the domestic economy.

The current account position for this fiscal year shows 17 billion dollars reserves of foreign exchange, 7 billion dollars’ exports and imports of 17.5 billion dollars. This situation tell the story of need for IMF funding and 3 billion dollars inflow from Saudi Arabia and deferred payment for oil imports. No visible improvement in exports is expected in the near future as according to medium-term strategic plan, the exports target for 2022 is 23-24 billion dollars, while in 2025 the exports will remain around 28 billion dollar in pessimistic scenario 34 billion dollars in doable and 37 in optimistic scenario. So, again we will have to depend on workers’ remittances for next 3 years to control over current account balance.

PAGE: Your views on energy consumption and production in Pakistan:

Dr. Ayub Mehar: There is no doubt that to achieve GDP growth target of 4.5 percent, enhancement in exports and attractive foreign investment and even growth in domestic industrialization energy is the basic requirement. Though the direct contribution of electricity and gas generation and distribution in GDP growth is 2 percent only, its growth in value addition has arrived at more than 40 percent. But, still this sector requires further participation of private sector. The share of oil and gas in electricity production is rapidly increasing in Pakistan though transport sector is still the largest consumer of oil in Pakistan.

In last fiscal year, it consumed 65% (16 million tons) of the total 24.7 million tons oil consumption. The consumption of oil has increased by 40 percent during the last 10 years, however, growth of consumption in transport sector was more than 90 percent. A sharp decline of oil consumption in industrial sector has been noted which indicates the shift in industry from oil to natural gas. The growth in consumption of natural gas was almost 100 percent in industrial sector during the last 10 years. These statistics reflect the need of investment in oil and gas sector. Total investment (gross fixed capital formation) in electricity and gas generation and distribution sectors in Pakistan was Rs.210 billion during the last fiscal year which was around 4 percent of gross investment. However, 96 percent of this gross fixed capital formation in electricity and gas generation and distribution sector belongs to the public sector. The share of private sector in this activity is negligible. It indicates the important fact that domestic private sector is reluctant to participate in the gigantic investment in this sector.

Consequently the dire need of development in this sector depends on the public sector participation and foreign direct investment. Current efforts to bring improvement as well as attracting foreign investment in this sector include international agreements for exploration of oil and gas, erection of new refineries, and enhancement in the existing refineries. In fiscal year 2000-01, the installed capacity was 17498 MW and generation was 68117 GW per hour.

Now the installed capacity is 33553MW while generation is 120715 GW per hour. However, the share of thermal capacity has increased which is the cause of increase in power tariff. Another surprising fact is that the installed capacity has increased by 92 percent during the last 10 years but increase in generation is 77 percent- much less than growth in installed capacity. It reflects that the share of idle capacity has increased in power sector. In fact, the oil based thermal units are idle because of hike in oil prices.

In term of energy-mix, Pakistan reliance on oil was reached at 43.5 percent in fiscal year 2000-01. Now, oil reliance has reduced to 30 percent which is a welcoming sign. Similarly, hydroelectricity had a 13 percent share in 1997-98, which is now at 7.7 percent. It can be observed that the share of hydro in electricity generation has decreased over the last few decades. Availability of water is one of the main reason for reduced generation of hydroelectricity. The hydroelectricity is the cheapest energy, but, Hydropower plants are the most capital intensive projects and for Pakistan, it is not possible to undertake such big projects without the financial support of international development organization (World Bank, Asian Development Bank, and International Finance Corporation etc.).

The government efforts to construct the large dam for water reservoirs and energy are quite obvious but current fiscal space does not allow government to construct these dams through tax payers’ money. Government has formed a task force on energy to propose immediate, medium and long-term policy interventions with the aim to provide indigenous, affordable and sustainable energy for all. The large scale grid connected renewable energy based power generation projects are being pursued through private sector.

Check Also

Better, improved business likely in 2022

Better, improved business likely in 2022

Interview with Mr Nasir Chand — Assistant Director, Banquet Sales, Movenpick Hotel Karachi PAGE: Tell me …

Leave a Reply