Balance of Payments on the verge of collapse




The Balance of Payments will be going to collapse in the near future, told high-level sources from the prime minister’s economic team.

The Balance of Payment (BOP) will be under tremendous pressure which is quite explicit from the current account deficit of July-November 2016.

The government is considering going back to International Monetary Fund (IMF), however, due to the fear of a severe political backlash, it is looking for a face-saving in this regard, said a highly-placed source.

Pakistan’s BOP has been facing a severe pressure for the last several years, however, primarily, with the help of IMF and numerous other factors, the government was able to sustain the pressure.

The sources from Ministry of Commerce also confirmed the reports that there are mainly five ways to avoid this disaster:

  1. Government goes to IMF, although political repercussions are strong barrier for the government in this regard.
  2. Establishment of Export-Import Bank of China and China inject money into it.
  3. China-led Asia Infrastructure Investment Bank gives loan to Pakistan.
  4. Issuance of Sukuk Bonds.
  5. Privatisation of organisations which government has long been planning to execute. This option, however, would not be viable for the government to carry out at this point of time.

This worsening of the BOP despite finance minister’s claims about Pakistan’s successful completion of IMF’s programme raises some big questions on the so-called track of economic growth and development in Pakistan.

The situation would arise since the foreign reserves are decreasing along with the foreign direct investment; while the government, on the other hand, will have to pay back the debt. This would generate repayments crisis, primarily, because of the severe shortage of foreign exchange reserves.

Responding to this news report, State of Bank of Pakistan (SBP) replied: “While we acknowledge that the current account deficit has increased significantly during Jul-Nov FY16-17, compared to the corresponding period of previous year, the assertion that “Pakistan’s balance of payments will be under tremendous pressure (almost in a state of collapse)” is exaggerated and unfounded.

In our view, the continued growth in remittances, a slowdown in imports, an uptick in exports, and significant financial inflows (both CPEC and non-CPEC) offer a very encouraging outlook on the country’s balance of payment.

In this context, the following points are worth noting:

  • The workers’ remittances, after showing some slowdown in the first quarter of FY, owing to seasonal factors, have started showing a rising trend in recent months. This encouraging trend is likely to gain further momentum, as the initiation of infrastructure projects in Saudi Arabia (under its vision 2030), FIFA 2022 Football world Cup in Qatar, and Expo 2020 in Dubai would spur the demand for workers in the GCC countries.
  • The decline in exports also appears to have bottomed out. Furthermore, the outlook is positive as the recent recovery in global cotton yarn prices has increased the cost of production for our competitors (such as Vietnam and Bangladesh) who rely on imported cotton yarn. Pakistan, being one of the large producers of cotton, can gain advantage in this situation.
  • The surge in imports came on the back of a high demand for machinery, used in power and construction sectors, for CPEC-related projects. More importantly, the financial inflows from China are available to fund these additional imports.
  • The CPEC projects are also expected to improve Pakistan’s soft image and turn it into a lucrative market for foreign investments from other countries. A few instances already exists, as a Turkish firm (Arcelik) has acquired Dawlance; the Renault – a French car manufacturing company – is expected to start assembling cars in Pakistan by 2018; and Pak-Suzuki Motors (a Pakistani affiliate of Japanese automaker Suzuki) plans to invest $460 million in Pakistan to set up a second plant.
  • Moreover, after stabilisation, we are now in a growth phase. Largely, the increase in imports is attributed to capital goods.

Based on the foregoing, we understand that current account must not be a serious concern for the country.”

However, central reasons for all these crisis is “constant decrease in exports and increase of imports, expansion of current account deficit and absence of foreign direct investment”, said Salman Shah, former economic advisor for Ministry of Finance.

In response to what steps the government should take in order to counter these challenges, Dr Ashfaq Hasan Khan, a leading economist of Pakistan, stated: “Government should revise the overvaluation of exchange rates, holding of refunds and senseless taxation that includes increase of zero-rated taxes up to 5pc”.

According to Dr Asfhaq: “Government should try to make their exporters competitive in the International market and must either decrease the cost of production or give them incentive through the adjustment of exchange rate”. The prime minister should directly negotiate with the exporters on regular basis and must address their issues, he added.

Additionally, Salman believes that the message of good governance should be given and the government should stop manipulating the economy rather improve transparency and execute tax reforms.”

In the short run, he added, Pakistan can improve its position in the Global Competitive Index and in Ease of Doing Business Index just with a stroke of pen reforms — adjustment of exchange rate and through making our exports competitive. Pakistan is on 122nd position over the former while it lies at 144th in the latter.