Pakistan is facing pressures on its external liabilities. Financing requirement for FY23 is around USD 33.50 Billion which includes repayment of external debt liabilities and to bridge the gap of Current Account deficit. After being downgraded by international credit rating agencies, speculations of Pakistan’s default on external debt repayments became headlines and it was being considered as a default case scenario like Srilanka. This is due to political uncertainty inflicted after Vote of No Confidence (VNC) against Mr. Imran Khan government in early April this year which was then replaced by PDM regime having multiple political parties with decades old hereditary style of formation. It is important to mention here that Srilanka was experiencing such a situation where one family was ruling the country. PDM slogan to oust Pakistan Tehreek e Insaf (PTI) was to rescue public from inflation whereas Mr. Imran Khan claimed the situation is created on an imported agenda to curb Pakistan from making independent decisions for its future.
As soon as PDM came into power, its Ministry of Finance (MoF) claimed that tranche from International Monetary Fund (IMF) is important and blamed PTI for not following conditions imposed by IMF and due to such mistrust, Fund is reluctant without solid assurance for future behavior of Government of Pakistan (GoP). During such tenure China initially did not roll over its SAFE deposit after regime change and this outflow further impacted Foreign Exchange (FX) position of Pakistan which led Pak Rupee to depreciate considerably against US Dollar. In June however China re-deposited $2.27 Billion but the free fall of Pak Rupee did not stop. Interbank first time crossed Rs.240 approx. per Dollar even following news of draft staff level agreement with IMF. PDM MoF initially stated after its first meeting with the IMF that the fund doesn’t see a near default situation. However while increasing petroleum & energy prices PDM MoF claimed that PTI betrayed IMF on Fuel subsidy and they needed harsh decisions over the economy which would have a negative impact on their Political career. Then Pakistan witnessed historic high prices of fuel and energy which led to significant increase in inflation resulting in a discount rate to jack up. While making such observations Mr. Miftah Ismail shared the Economic Survey of Pakistan period related to PTI performance in which it was clearly stated that GDP touched 6% growth whereas the country achieved above 5% GDP growth for consecutive 2 financial years despite the fact that Global Economy was slowed down due to pandemic impact.
Recently, State Bank of Pakistan (SBP) stated that Pakistan is not among the most vulnerable countries in the world whereas Pakistan’s $33.5Billion external financing needs are fully met for FY23. Though it provides a very optimistic view however Economic Survey of Pakistan also states that GDP was growing at a decent pace with economic indicators being presented as under control. It is important to mention here that SBP is enjoying autonomy after a bill passed from the National Assembly in PTI regime therefore presents a logical and independent view. Apart from all figures and justifications it is also an important fact that Pakistan’s external liabilities are swelling with such growth and it needs an economic emergency with full centric control on internal and external economic activities. Hence it needs some urgent steps toward reviving economy of Pakistan broadly divided into four main components; Debt Repayments, Twin Deficits i.e. Current Account Deficit (CAD) & Trade Deficit, Fiscal Deficit and Foreign Exchange (FX) Reserves. Next part of this article will discuss some urgent steps required to avert this economic downturn.
Starting with Debt Repayments, Pakistan needs strong face of the Government having full power to negotiate with international financial institutions and friendly states for immediate debt restructuring / rescheduling so that country may get a reasonable relief time period to pick up momentum towards exports and remittances while world is sinking into possible recession that can go longer than 12 months. Deferred payment facility for Oil & Energy together with Food & Medicine from Russia, China, Saudi Arabia can further delay the payment obligations.
Current Account Deficit (CAD) is a major factor due to which Foreign Exchange Reserves are depleting and requires external financing. Due to depleting reserves Pak Rupee value against Dollar is on free fall. CAD stood at $ 17.5 Billion i.e. 4.6% of GDP in FY22. It is a notable fact that overall economic activities increased in this period that includes import, export and remittances if one may compare it with FY18 when it peaked at $19.2 Billion. However after VNC economic activities halted due to political uncertainty. CAD can be controlled when Balance of Payment from import and export activities may be positive. The balance of payment crisis starts when apart from necessary machines or raw material for industrial production or lifesaving drugs a country start importing items that may be available locally. It could be fast moving consumer goods or home appliances or cars etc. Merely increasing import duties cannot stop this large segment for long.
Promotion of local brands can lead to abstaining from such imports which need some quality control assurances from government institutions. These institutions are already available, but corruption becomes a massive hindrance and stops them from working properly, thus allowing multinational companies to enter the local market. If we observe consumer preferences, we may see that we as a nation do not use even our own water, purified by our local facilities, but buy multinational brands selling the same thing. On an immediate basis, quality & Price control departments to become effective so that local brands may be trustworthy and a fair competition to be developed between imported, MNCs and local brands. It will control FX drain whether it may be a Car, Mobiles or food & beverages.
For MNCs laws need to be amended for input material and dividend outflows. For input material it should be made binding on MNC to utilize local inputs or if such quality may not be available then give a short time frame when technology may be transferred to Pakistan to attain such quality. Further it should be binding on MNCs to stop dividend outflow every year for next 5 years and after 5 years 10% of first year and 50% of 6th Year dividend outflow may be guaranteed. These two steps will control FX outflows immediately and MNCs will not be discouraged as well. Sponsors of these MNCs to transfer technology on Supplier Credit Facility so that immediate FX outflow may be avoided.
Ban all imported goods related to luxury items including CBUs of Cars, Mobiles, Home Appliances together with food & beverages and other non productive items where import substitution is available in Pakistan. Exporters may be asked to hedge maximum of its imports with that of export proceeds where importers to be encouraged to establish Usance / Deferred Payment Letter of Credits for which Ministry of Forieng Affairs to take lead for negotiating with friendly states from where Pakistan imports; mostly like China. Likewise Exporters may be encouraged to negotiate Sight Payments so that early export proceeds may give a boost to forieng exchange. Due to Country risk such negotiation will require an active participation on G2G level.
Exporters need Tax refunds, cheap credit facility from banks and regionally competitive energy prices. For tax refunds an allocation of budget is required which may be little difficult for any government to arrange however export refinance facility should be available on lower rates rather than link it with discount rate whereas long term refinance scheme may be abolished as sufficient capacity enhancement has been executed in FY21 & FY22 by exporters. For Regionally Competitive rates of energy first of all energy procurement on lower rates and on deferred payment basis are required i.e. from Iran, Russia & Saudi Arabia. Moreover it is important to utilize Daylight saving where a strict policy on Offices and Market timing to be placed. 4 working days a week strategy should be implemented so that fuel for electricity may be saved and industries may be supplied with uninterrupted electricity.
IT exports were growing like never before in the last 3 years. Momentum to continue is required as it will decrease dependence of country on one or two sectors only. In Budget FY23 IT sector including freelancers are now came into regular taxation framework which required revision by considering it emerging export market where import duty on equipment can stay. Major hurdle is the tax regime and IT people are now establishing companies abroad to avoid harsh tax measures taken in Budget FY23.
Pakistan is an Agricultural state and promoting agriculture will not only ensure food supply even during any other pandemic but it can secure FX while other countries may be affected by the Super Cycle in the international commodity market. Moreover Agri Exports can bring good FX inflows from selling our products to China, Iran, UAE, Central Asian Republics etc. It is a notable fact that China imports USD 120 Billion food items on an annual basis. For said reason subsidized diesel & fertilizers according to size of Pass Book can facilitate cultivators.
Textiles produce 55% of export where major input material is Cotton which Pakistan produces but not in large quantities. Bangladesh recently facing a BoP crisis for which it requested the IMF for some 4.5Billion Dollars. CAD of Bangladesh is worsening and FX reserves depleting affecting Currency parity as well. This is because their imports are widening whereas exports are slowing down due to pandemic and impact of premature global recession. Bangladesh is heavily dependent on Textiles like Pakistan but Pakistan has an edge over Bangladesh and that is assurance of supply chain related to said industry. From cotton to end product Pakistan is a one step solution for European or US importers of garments where distribution cost is also playing a major factor i.e. container / transportation cost has increased manifold since COVID19 hit the world in 2020. Orders are now coming towards Pakistan from last 2 years when despite of COVID19 Government did not close factories. Therefore such flow of export orders needs its momentum to continue rather any blockage may stop it. Therefore Cotton Growers need immediate attention.
Rather than increasing taxation rates or imposing high rated super tax on already tax paying entities, a compulsory investment into Pakistan Stock Exchange or Venture Capital companies for Fertilizer and Energy related industries according to profit can be imposed. With such an obligation not only the company will be having such profit amount into retained earnings but these increased retained earnings when become part of equity can be used to get more financing from banks whereas the fertilizer or energy companies may be getting funds for its operations other than banks to avoid heavy interest rates. Cheaper funds may encourage profit earnings which eventually will be taxed at normal tax rate regime and it will increase tax basket.
Privatization is another source of immediate inflows of FX. Rather panic selling of State Owned Enterprises (SOEs) Pakistan needs Privatization Commission based on format of Wealth Management or Venture Capital Companies where through Public Private Partnership from across the globe including expatriates may participate into such activity. This will not only raise FX but it will revive the sick unit in a way that the investor with controlling rights will eventually get better returns where Pakistan’s stake in assets will also remain. For this reason, Pakistan’s government must ensure a smooth and speedy IPO process, while education about private equity companies should be disseminated to the public at large. This will result in foreign exchange inflows from China, other countries, and expatriates. However, reinvesting returns into these special companies may be negotiated with investors so that outflow of funds can be avoided.
For Fiscal & Budget Deficit immediate solution is to cut off all non productive non revenue expenditure other than social security. Politicians use PSDP/Development expenditure for gaining votes from the public rather than utilizing it for real development of Pakistan. Immediate remedy is to reduce gaps between revenue and expenditure where PSDP and Provincial developmental budgets to rationalize. Government Officers layers are too much in departments which results in heavy administrative expenses therefore to reduce expenses not only to reduce layers to one third but to abolish certain unnecessary ministries which can be controlled by one minister only. It will also improve digitalization of administrative activities and control will be centeric in nature. One more step will stop increasing layers is to delay CSS/PCS induction for some 5 years other than Judiciary where more judges are required for swift justice. More timely Justice, more productivity in human activities. Either Promote performing government officials who better understand grass root level problems or use subject specialists from Private sectors like Corporate Bankers, industry specialist etc because private sector people do much better multitasking in a certain amount of remuneration.
CNIC condition for shopping Rs.50,000 or beyond should be imposed immediately so that more people may come into the tax net. Rather than providing fuel subsidies indirectly, Fuel cards are to be launched, like CNIC based Health cards, which may have a registered bike or Rikshaw or car less than 1000CC. Employers issue fuel cards to employees as a package of salary and those who are given fuel card by companies will be removed from the list of subsidized fuel cards issued by the government. A proper database management will be key to success in this regard however a major subsidy amount will be reduced and poor people of Pakistan will be relaxed from such high expense. Saving from PSDP, Fuel Subsidies, reduced administration expenses can be used to reduce fiscal deficit and electricity prices.
Pakistan’s banking system needs to be addressed very technically. An immediate tilt towards Islamic banking may give better results for just distribution of money in the shape of credits or loan. The Islamic banking system promotes opportunity of business on partnership and rental basis rather than giving loans on interest as conventional banks do.
Pakistan needs a strong government with full power who may be able to implement policies and can better negotiate business conditions on the international front. The government can take actions on the challenges discussed in this piece and take immediate measures to deal with the grim situation Pakistan is facing. We as a nation also need to change our priorities where we need to promote our own brands and use digital ways of business activities so that more people may come into the tax net. A mutual effort from the government and the people will help make Pakistan a prosperous country.
