A World Bank report warns that Pakistan’s external sector situation could become unsustainable due to a lack of policy actions. The report, however, appears to exaggerate the problem due to the claim that Islamabad needs $31 billion this year to meet foreign financial obligations.
In its twice-a-year South Asia Economic Focus (SAEF) report, released on Monday, the bank said that external account pressure has persisted in the fiscal year 2017-18. “The current external situation can become unsustainable in absence of adequate policy response,” warned the global lender.
It added that the official foreign currency reserve coverage for current account deficit, external debt payments, and portfolio investment has also declined. One year ago, Pakistan was in a comfortable position, as international reserves were large enough to cover the current account deficit, the service of external debt, and even the total volume of foreign portfolio investments in the country, according to the report.
The report said that international reserves can still cover the current account deficit and external debt payments, but not liabilities of foreign portfolio investment. It added that addressing the sources of this increased vulnerability should be a priority for the government.
In the report, the bank claims that Pakistan’s gross external financing needs – the money required to meet foreign obligations, would be equal to 9% of gross domestic product (GDP). At the current estimated size of Pakistan’s economy, this translates to a whopping $31 billion.
The $31 billion foreign financing requirements are more than double Pakistan’s gross official foreign currency reserves of $13.8 billion.
The World Bank has worked out the nine per cent annual external financing requirements by including foreign portfolio investments, which is not a traditional method of working out the financing requirements. The bank estimated foreign portfolio investment at 4% of GDP, or $13.8 billion. The inclusion of foreign portfolio investments in the external financing requirements blows the problem out of proportion, said Dr Hafiz Pasha, a former federal finance minister and a well-respected fiscal expert.
He added that even the claim that foreign portfolio investments equalled 4% of GDP was also incorrect.
There is a consensus among the country’s leading independent economists that Pakistan’s external financing requirements will be close to $20 billion, or 5.8% of GDP during the current fiscal year.
World Bank response
World Bank Chief Economist for South Asia Martin Rama explained to The Express Tribune that the purpose of including foreign portfolio investment was only to highlight the problem. In 2016, Pakistan was in a very comfortable position when reserves were not only sufficient to cover the gross external financing needs of the country but even the entire stock of portfolio investments, Rama said in a written response.
He further stated that in 2017-18, the reserves are expected to be slightly below the sum of the current account deficit and scheduled debt repayments, creating an external financing need. “The stock of portfolio investments is not part of the financing needs of the country, but the figure is meant to highlight the importance of maintaining a solid reserve buffer going forward,” he explained.
This point, however, does not appear in the report, which may create unnecessary problems for Pakistan, which is already struggling to balance its external sector.
Since the IMF programme came to an end a year ago, external economic indicators have deteriorated. The current account deficit has doubled to 4% of GDP or $12.1 billion, which rang alarm bells.
Just last week, Pakistan’s federal cabinet announced a host of measures to correct the imbalances in the external sector that include offering more incentives to exporters and placing restrictions on previously unrestricted imports.
In its report, the World Bank said that new data for July and August showed that the deterioration of the external sector would continue. “Efforts to reverse the current imbalances and continued implementation of structural reforms will be needed for sustaining and accelerating growth and improving welfare,” said the bank.
It said that improving the external balance hinges upon a revival of exports, a slowdown in imports, and stable remittance flows. In the absence of any of these factors, the persistent current account deficit will put further pressure on already-dwindling reserves.
The fiscal position is also expected to deteriorate during the election cycle, which would affect debt trends and maintain debt at the around the already-high level of 68.2% of GDP, it added.
The bank also said that despite concerns about its weakening macroeconomic discipline, economic growth in Pakistan is expected to increase to 5.5% in the current fiscal year.
By Shahbaz Rana
Published on Tribune