Financial emergency: possible/probable?

Is the declaration of a financial emergency imminent if the budget 2018-19 is implemented? This has been categorically rejected by Federal Finance Minister Miftah Ismail as one would have expected – the primary beneficiary of Ishaq Dar’s decision to stay away from Pakistan rather than face the possibility of jail time, if convicted, for possessing wealth beyond known means of income.

This query is made not to raise the hackles of Pakistan’s international and domestic creditors but to bring to the forefront the major bottlenecks facing our economy today which require urgent remedial measures. The Abbasi-led administration has not publicly acknowledged that an economic crisis is looming and with less than a month before the end of its tenure all remedial policy decisions will, by default, have to be taken by the next elected government scheduled to take over at the earliest by September. The Caretakers are not mandated to take any major policy decision however Pakistan’s fast eroding foreign exchange reserves may compel the interim government to seek a consensus from all three national parties (Muslim League-Nawaz, Pakistan People’s Party and Pakistan Tehreek-e-Insaf) on specific remedial measures. This would be all the more necessary after more realistic data is released by the Pakistan Bureau of Statistics (PBS) by the end of the fiscal year.

Ismail has persistently refused to acknowledge that there is a problem, perhaps partly based on his lack of understanding of the extent of the economic issues facing the country today and partly due to the negative implications of such an acknowledgement on the ruling party’s 2018 election bid. Ismail’s approach has been to consistently claim that the economy is in no imminent danger, no declaration of financial emergency is on the cards, and to prove that he is doing a good job he has displayed a rather rare temerity within the PML-N ranks: contradicted Nawaz Sharif by insisting that the rupee depreciation was a good decision.

Article 235 of the Constitution stipulates that a financial emergency can be declared if the President is satisfied that “a situation has arisen whereby the economic life, financial stability or credit of Pakistan, or any part thereof, is threatened.” The question is has a situation arisen whereby the economic life, financial stability or credit of the country has been threatened?

A look at the domestic and foreign debt in 2013 and today gives rise to extremely serious concerns. Gross domestic debt more than doubled – from 7.6 trillion rupees in 2013 to 15.9 trillion rupees by February this year and is expected to be much higher by the end of the fiscal year on 30 June. To put it in perspective the accumulated domestic debt over 66 years of this country’s existence was lower than what the PML-N administration incurred in the past five years. Was this additional debt channeled into a significant rise in infrastructure development? The jury is no longer out on this as the electricity shortfall was reportedly around 6,000MW during this week past, due to the flawed policy of this government to focus on generation (including taking inexplicable decisions like setting up coal plants away from the port – the source of imported coal), while ignoring: (ii) strengthening the transmission network, which was merely 15,000MW as per the Secretary Water and Power by end 2012, and has increased to 16,500MW according to PML-N claims while generation has increased by 10,000MW to over 28,000MW, and (ii) sustained poor governance of the sector reflected by the rise in circular debt to over one trillion rupees. Additionally state owned entities losses requiring support from the budget are now over a trillion rupees.

So how did the PML-N tackle domestic debt? First, by redefining debt in the 2017 Finance Bill, and, secondly, lowering the interest rate on savings schemes. The former decision led to a significant decline in gross domestic debt, and the lower return on savings schemes led to a widening in the savings-investment identity, implying greater reliance on foreign savings (read loans) prompting the government to recently raise the rates again.

Foreign debt rose from 60 billion dollars in 2013 to 93 billion dollars by the end of the current year which the government claims is 69 percent of the Gross Domestic Product. Pro-PML-N analysts argue that this compares favourably with Greece’s 180 percent in 2016, Portugal’s 130 percent, Italy’s 130 percent, Spain’s 99 percent. However, had these countries not been within the Eurozone bloc, it is doubtful if they would have been able to access large amounts of bailout packages. As matters stand today Greece is being pressured into implementing reforms that are extremely challenging for the common man to meet the repayment deadlines after August this year.

While domestic data has been grossly manipulated to show a state of the economy that is unrealistic yet Ishaq Dar and his successor Miftah Ismail were unable to manipulate trade data, current account deficit data and foreign exchange reserves because the State Bank of Pakistan uploads these figures routinely on its website. The trade deficit is widening notwithstanding the export incentive package, the two depreciations and regulatory duties on luxury imports. And remittances have been unable to fill this widening gap and consequently the current account deficit is also widening. Pakistan has foreign exchange reserves that are unable to meet three month of imports, the minimum required. If this situation continues and if there are no major revisions in policy the reserves will continue to whittle away compelling the government to access the remaining 6 billion dollars from the IMF which by itself may not be enough to stave off a crisis.

As per the March 2018 IMF report, “The elevated current account deficit and rising external debt service, in part driven by CPEC-related outflows (loan repayments and profit repatriation), are expected to lead to higher external financing needs, which are expected to rise from US$21.5 billion (7.1 percent of GDP) in FY 2016/17 to around US$45 billion by FY 2022/23 (9.9 percent of GDP)….. Risks to public debt sustainability have increased since the completion of the Extended Fund Facility…..gross fiscal financing needs will likely exceed 30 percent of GDP from 2018/19 onward, in part reflecting increased debt service obligations……the authorities’ success with contracting external borrowing (over $10 billion in FY 2016/17 and more than $6 billion so far in FY 2017/18) has been instrumental in softening the impact of the rising external imbalances on foreign exchange reserves. While the level of external debt (27.4 percent of GDP in FY 2016/17) has remained moderate, continued mobilization of external financing at favorable rates could become more challenging in the period ahead, against the background of rising international interest rates and increasing financing needs….At present, gross reserves amount to about twice Pakistan’s outstanding Fund repurchases (SDR 4.4 billion). Repayments to the Fund are scheduled to start at SDR 243 million (including GRA charges and surcharges) in 2018 and peak at SDR 820 million in 2021 with a gradually declining schedule until 2026. While these obligations do not exceed 6 percent of total external debt service in any year, their share in gross reserves is expected to rise significantly in the medium term, reaching close to 15 percent in 2022”.

This dire prognosis was made mid March this year and patently had no impact on the Abbasi-led government which announced massive tax concessions, estimated at 184.49 billion rupees according to the Federal Board of Revenue with estimated higher taxes generating 93 billion rupees giving net negative 91 billion rupees to the treasury, while inexplicably projecting 13.4 percent higher tax revenue on the back of a projected (unrealistic) growth rate that, even if achieved, is unlikely to raise revenue collections as historical data suggests little linkage between growth and higher revenue collections in Pakistan.

At the same time, the economic life of a Pakistani citizen is featuring much in the news these days because of the visits and remarks of Chief Justice of Pakistan Saqib Nisar on the poor performance of government hospitals and education institutions in Punjab, Khyber Pakhtunkhwa, Sindh, Balochistan and Azad Jammu Kashmir. Criticism by politicians that the Chief Justice has overstepped the bounds of his constitutional right were rejected by him and during a related case’s hearing he stated: “I am operating within the authority given to me under the Constitution. These measures of mine shouldn’t be considered interference with anyone’s authority. This is my constitutional right.” The Chief Justice has also taken notice of irregularities/corruption in 56 companies in Punjab including clean drinking water projects, while correctly insisting that provision of clean water is the responsibility of the provincial governments. In July last year a report was submitted to the apex court which claimed that 90 per cent of drinking water samples collected from Karachi were unfit for human consumption and a significant portion was tainted with human waste prompting the Chief Justice to remark that “I wish [PPP leader] Bilawal Bhutto Zardari knew of the [water] situation.”

If the reserves continue to decline, so projected as a large repayment on a foreign loan is due in June, and the economic life of an average Pakistani continues to decline a situation for declaration of financial emergency as per the constitution would emerge. Ironically the PML-N is the only party that has a number of qualified and experienced economists within its ranks, particularly Sartaj Aziz, however, disturbingly, the leadership’s selections continue to be nepotism based.

To conclude, all sectors – be they the ubiquitous establishment, the civilian bureaucracy, the politicians or the common man need to work together to cut down expenditure and raise government revenue through an equitable, fair and non-anomalous tax structure. Concurrently, policies that seek to vigorously control imports and fuel exports (including repayment of refunds) must be implemented. That is the only way forward.