March 30, 2020
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Five Weeks To Disaster?

Sanctions, dipping forex reserves, high debt spell economic doom

Five Weeks To Disaster?

PAKISTAN may have salvaged its wounded nuclear pride, but the hard economic reality is that its people will soon have to 'eat grass'. And that could be just five weeks away.

Public bravura notwithstanding, finance minister Sartaj Aziz is well aware that sanctions could cripple a country that lives off imports and foreign funds. "The sanctions against both India and Pakistan by the US and the European Union could be even-handed, but Pakistan's capacity to absorb these shocks is far less," Prof. Ian Bellany from the University of Lancaster told Outlook.

Pakistan's foreign exchange reserves are at $1.2 billion, barely enough to meet five weeks of imports. Food, mainly wheat, and fuel account for 36 per cent of imports. Exports are about two-thirds of imports value, leaving a massive trade gap of $5 billion. The other face of the hydra is external debt. At over $30 billion, it is more than double that of exports and takes over 40 per cent of the GNP. The short-term debt component is a high 15 per cent. Annual debt servicing runs up to $5 billion, according to the State (central) Bank of Pakistan. With $1 billion-odd debt repayments looming, and US and Japan, biggest trade and development partners, slapping sanctions, Pakistan may be forced to go in for a moratorium on debt repayment.

Income growth remains poor, with GNP growing at 3.5 per cent in 1995-96. With 14 per cent savings rate, Pakistan is also a poor saver. Significant liberalisation and privatisation undertaken by the government has improved growth prospects of the domestic economy. Foreign direct investment has risen of late, to $690 million in 1996, most of which has gone to the power sector, with the US and Japan being major contributors. Sanctions at this crucial juncture could take the reforms process back by at least five years. The government's liberal financial policies could prove a bane now. Already, all foreign currency transactions have been suspended and fears are that private foreign currency accounts in banks, totalling $10 billion, could be frozen.The Pakistani rupee, at Rs 45 before the tests, has tested Rs 55 in panic trading.

Some $3-4 billion in direct aid stands threatened. Just before the tests, Aziz told reporters after the Pakistan Development Forum meetings that over $5 billion of aid had been lined up for the current fiscal beginning July 1. Japan had committed loans of about $1.68 billion. The US, which recently renewed assistance after partial lifting of curbs imposed in 1990, has only about $100 million in grants and loans committed to Pakistan. But it could put on hold a rollover of around $500-700 million of commercial loans and swap funds invested in the US by Pakistani banks. "Foreign banks have stopped cross-border financing into Pakistan and more pressures from the US might follow," says a foreign bank executive. In drawing a post-sanctions scenario, Aziz had estimated a loss of $5 billion owing to cancellation of half of all aid and withdrawal of insurance cover provided by US banks.

Also under threat is the remaining $1.2 billion of the $1.6 billion IMF structural adjustment loan, two tranches of which have come in. As for the World Bank, it has said Pakistan will get the $2 billion approved for 41 projects. But projects worth $750 million in aid pending approval could be in jeopardy. Says Gautam Sen of the London School of Economics: "The Pakistani economy is very close to default."

Already, remittances from Pakistanis employed in the Gulf have shrunk considerably, and there are little signs of anybody or anything filling the gap. Pakistani officials are looking to "friendly countries" like the Arab nations, China and Iran to fill this gap, one commentator wrote in the Jung newspaper. Without that, he said, payment default could be a fait accompli.

With times so hard, all eyes are riveted on the June 13 budget. Revenue inflow is estimated to be just half of the budgetary expenditures of Rs 550 billion. A substantial part of this goes to defence, already at around 30 per cent of central government spending and rising after the tests. Nawaz Sharif has asked the Central Board of Revenue to prepare a package of tax reforms to generate Rs 500 billion for the current year. Citizens have been asked to tighten their belts and live simply. The government is expected to unveil a national agenda launching a campaign to boost exports, raise more revenues and expand farm production. The solution could take much more than that.

Says Munir Ladha of traders M.L. Securities: "Only changing your lifestyle will not solve the problems of the economy which is already in recession. The stock market is at its lowest ever at 1,040 points, nearly $5 billion have been wiped out of the market. It will take a long time to bring it back to the earlier position." What he didn't mention is that severe inflation and back-breaking taxes could be the first signposts of a long and dreary road ahead for the economy.

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