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Pakistan outlook 2013 – II

The biggest worrying factor is the growing size of domestic and external debt that has risen to Rs 14.8 trillion. Based on the official size of GDP of Rs 19. 437 trillion and an estimated fiscal deficit of 4.7 percent, which means that annual debt financing will be of Rs 914 billion. Interestingly, Pakistan’s Central Bank is projecting fiscal deficit to hit 6.5 percent by the year-end.

This calculation could be based on by adding the circular debt amount that has once again reached Rs 380 billion mark. Assuming that if the circular debt amount is required to be settled in FY-13 like past year, it is most likely to hit 6.5 percent and this could be one reason that our financial managers are hesitant to revise fiscal deficit target upward because they may not have taken circular debt amount into account that could push further up. A fiscal deficit of 6.5 percent means that deficit financing will easily surpass Rs 1.3 trillion mark.

An interesting point to note is that as per SBP official website of December 28, 2012, Pakistan’s GDP is Rs 19.437 trillion and it shows a combined external and domestic of Rs 14.8 trillion, which means debt-to-GDP has reached 76 percent, which is in violation of Fiscal Responsibility and Debt Limitation (FRDL) Act. Moreover, some external estimates suggest that the size of GDP is Rs 23.5 trillion. It means debt financing, based on fiscal deficit of 4.7 percent will hit Rs 1.1 trillion mark and if calculation is based on 6.5 percent then debt financing will surpass 1.4 trillion mark.

Furthermore, to have a better picture to explain how debt financing is managed the data below could be helpful. To meet deficit financing needs, borrowing is either made directly from SBP (MTBR) or made through sale of government securities (T/bill-PIB-Sukuk). If we look at last 3 years’ data, in 2011 MTBR was Rs 1.317 trillion and T/bill-PIB-Sukuk Rs 2.815 trillion; in 2012 MTBR was Rs 1.759 trillion and T/bill-PIB-Sukuk Rs 3.95 trillion and till date MTBR is Rs 1.675 trillion; T/bill-PIB-Sukuk Rs 4.501. The trends suggest that by the end of FY13 MTBR could hit Rs 2 trillion mark and the sale of T/bill-PIB-Sukuk could surpass Rs 5 trillion mark.

On the trade front, the deficit gap between import and export is expected to fall below USD 15 billion if average price of Arabian Light Crude Oil stays around current average price of USD 108 for the next 6-months against the projection of USD 112 per barrel. It will ease pressure on current account deficit that could dip below one percent against an estimated 1.5 percent. If calculation is based on annual price rise of USD 10, it would cost the exchequer USD 1.5 billion. Based on current price level, current account deficit for the fiscal year could dip to below 1 percent against the earlier estimate of 1.5 percent.

Discount rate and exchange rate The fate of discount rate and exchange rate will largely depend on the IMF if Pakistan decided to approach Fund’s window. An extremely tight monetary policy is one major cause of poor economic performance that forced industries specially textile sector workers to take to the streets. A high discount rate policy has broken the backbone of Pakistan’s economy, as it has acted as a double-edged sword for the nation in all respects. Pakistan is faced with an extremely difficult situation because as per my working, in the next 12 months (Calendar year 2013) period Pakistan will have to arrange Rs 1.5 trillion to finance its deficit. Higher discount rate is encouraging banks to invest in risk-free government securities that also discourages credit to private sector. While a slow growth also means a fall in revenue collection. If banks are paying tax against their earnings then it is worth noting that they are making a profit by investing in government paper, which means an additional burden on the taxpayer. Overall working will suggest that government and the nation are the net loser at the expense of banking sector profit.

I do not see inflation surging beyond 10 percent in the current fiscal year and therefore, another 200-300 basis points should be chopped at the earliest to give a much-needed boost to the economy. There is a possibility that in the next quarter inflation monster could creep up once again.

Rupee is a suspect against all odds, as increases in wheat support price strengthens my argument; it will weaken by 5-7 percent in this calendar year. However, I do not see any reason/justification for a weak rupee. With softer oil price, oil bill will not surge beyond an estimated target of Rs 15.1 billion in current FY, instead it will help trade gap to narrow against the fiscal year’s target. Here the fault-line is Coalition Support Fund (CSF). No delay should be allowed in relation to CSF. Pakistan is required to provide conditional support against advance payment as delay on funding would be totally unjustified for a country that face already enormous economic problems.

Some thoughts on IMF If Pakistan decides to approach the IMF, it always has three major demands prior to lending of fund. The Fund demands cut in deficit, which means no spending, hike in interest rates that makes borrowing expensive and depreciate currency that stokes inflation and has never helped exports to make substantial gains, nor had it helped counter imports.

IMF carries a reputation of a lender of the last resort and has a track record for making hard choices for countries in trouble and for the debt holders. The IMF could not exert extreme pressure on European borrowers, as they were successful with their demand to reduce borrowing cost so that debt does not rise at a fast pace. Neither IMF demanded for weak Eurozone currency, despite a demand for severe austerity measures Greece was given relief. Spain is not willing to succumb to IMF demand. Eurozone currency is a good example as in the last six months it has gained by 10 percent.

Our economic mangers should take a cue from Europe and urge the IMF for adopting a similar policy/strategy towards Pakistan. Country’s debt has surged to Rs 14.8 trillion mainly because of high discount rate and sharp depreciation of rupee and yet Pakistan’s economy is better than those of some advanced economies.(Concluded)

Asad Rizvi, "Pakistan outlook 2013 – II," Business recorder. 2013-01-05.