Moody's Expects Pakistan's New Mini Budget to Foster Exports and Import Substitution
Pakistan's new government led by Prime Minster Imran Khan has inherited large twin deficits. The new "mini budget" announced by Finance Minister Asad Umar "will support Pakistan’s manufacturing sector, fostering exports and import substitution, and help narrow the current-account deficit", says a January 31, 2019 report by Moody's investor service. The report adds that the tax incentives given to manufacturing and exports-oriented industries "will keep Pakistan’s budget deficits wider for longer, potentially eroding the credibility of government efforts to achieve fiscal consolidation."
Here's an excerpt of Moody's report on the immediate downsides of the measures announced by Umar on January 23, 2019: “We expect the deficit to widen to 6% of GDP in fiscal 2019 because revenue growth is likely to be below government projections, given slower economic growth and the new revenue-based incentives, before gradually narrowing to 5% of GDP by fiscal 2021 as the economy picks up. While we believe the government remains committed to fiscal consolidation, a wider for longer deficit could raise questions over the credibility of its fiscal policy."
Remittances from Pakistan diaspora rose by 10% year on year to $10.71 billion in the first half of fiscal 2019, while goods imports slowed sharply to around 3% year on year as non-energy imports contracted.
Moody's expects "the current-account deficit to narrow to 4.7% of GDP in fiscal 2019 and to 4.2% in fiscal 2020 from 6.1% in fiscal 2018, it will remain sizable and wider than in 2013-16, driving Pakistan’s external financing needs. The government has secured $12 billion in financing from Saudi Arabia and the United Arab Emirates – in each case amounting to $6 billion and divided equally between deposits and deferred oil payments – which is likely to largely cover the country’s net financing needs for fiscal 2019".
Beyond fiscal 2019, however, a net financing gap remains large because of the still sizable current-account deficit. Pakistan remains in negotiations with the International Monetary Fund over a new program that would provide a stable additional source of external financing, as well as technical support and assistance on macroeconomic rebalancing and structural reform policies.
On fiscal deficit front, the report warns that “there is a greater risk of fiscal slippage and slower fiscal consolidation in the absence of further revenue-raising measures. Pakistan’s revenue base was a narrow 15.4% of GDP in fiscal 2018, which ended June 2018.”
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| Pakistan Mini Budget Announced January 23, 2019. Source: Shajar Capital |
Here's an excerpt of Moody's report on the immediate downsides of the measures announced by Umar on January 23, 2019: “We expect the deficit to widen to 6% of GDP in fiscal 2019 because revenue growth is likely to be below government projections, given slower economic growth and the new revenue-based incentives, before gradually narrowing to 5% of GDP by fiscal 2021 as the economy picks up. While we believe the government remains committed to fiscal consolidation, a wider for longer deficit could raise questions over the credibility of its fiscal policy."
Remittances from Pakistan diaspora rose by 10% year on year to $10.71 billion in the first half of fiscal 2019, while goods imports slowed sharply to around 3% year on year as non-energy imports contracted.
Moody's expects "the current-account deficit to narrow to 4.7% of GDP in fiscal 2019 and to 4.2% in fiscal 2020 from 6.1% in fiscal 2018, it will remain sizable and wider than in 2013-16, driving Pakistan’s external financing needs. The government has secured $12 billion in financing from Saudi Arabia and the United Arab Emirates – in each case amounting to $6 billion and divided equally between deposits and deferred oil payments – which is likely to largely cover the country’s net financing needs for fiscal 2019".
Beyond fiscal 2019, however, a net financing gap remains large because of the still sizable current-account deficit. Pakistan remains in negotiations with the International Monetary Fund over a new program that would provide a stable additional source of external financing, as well as technical support and assistance on macroeconomic rebalancing and structural reform policies.
On fiscal deficit front, the report warns that “there is a greater risk of fiscal slippage and slower fiscal consolidation in the absence of further revenue-raising measures. Pakistan’s revenue base was a narrow 15.4% of GDP in fiscal 2018, which ended June 2018.”
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https://www.thefridaytimes.com/tft/boom-or-bust/
Now the US has appointed Mr Khalilzad to oversee a peaceful reconciliation with the “terrorist” Taliban under the stewardship of none other than the “double-dealing” Pakistanis. Is this about turn a manifestation of the failure of US strategy, and by corollary a success of Pakistan, in Afghanistan?
Interestingly, both the US and Pakistan are playing it cool. The US has not offered any mea culpa for two decades of misplaced concreteness and the Pakistanis are not crowing about being center stage again. Instead, both are working hand in hand to protect their respective national security interests. For its help in bringing the Taliban to the table and leaning on them to facilitate a respectable and orderly exit from Afghanistan in the next 18 months, the US has now channeled $12b to Pakistan via its strategic partners in Riyadh and Abu Dhabi. Indeed, the main reason for Pakistan’s new government’s delay in clutching at an IMF program was to clinch such a strategic “deal” with the US first so that the IMF would eventually soften its conditions for a bail out.
https://fp.brecorder.com/2019/01/20190129442991/
Fitch in its latest report "Industry Trend Analysis - CPEC to Remain a Primary Driver of Pakistan's Construction Industry" states: "We expect debt concerns surrounding CPEC projects to ease after financial details are released. In addition, we believe political risks associated with CPEC projects have diminished since the 2018 Pakistani general election. These factors will reduce overall risk profile of CPEC projects."
The report further states that the CPEC will continue to support growth of Pakistan's construction industry in the coming years, aided by China's sustained push on project implementation, as well as warming bilateral relationship between the two countries.
Since the implementation of CPEC, a centrepiece of China's Belt and Road Initiative (BRI), in 2013, the mega project has faced numerous challenges resulting in large downside risks to many projects. Despite these challenges, 11 CPEC projects, labelled as early harvest projects, have been completed thus far.
Despite significant media and political scrutiny of CPEC, this progress on projects underscores Beijing's improving track record in project implementation and its commitment to infrastructure development in Pakistan.
Since the inception of CPEC, projects have shown good progress in terms of execution; a total of 3,240MW of capacity had been added to the Pakistan's national grid, accounting for more than 11% of the total installed capacity in the country.
Also, the 392KM Multan to Sukkur section of the Peshawar-Karachi Motorway, a key CPEC project which broke ground in August 2016, is currently more than 80% complete and is slated for completion by August 2019. As such, Fitch believes that continued Chinese involvement in the Pakistani construction market will provide a positive upside in terms of timeliness and execution, and will continue to boost growth of the construction industry in the near future.
The report further states that debt concerns relating to CPEC projects will begin to recede on the back of improving transparency. In December 2018, reports relating to the Pakistani government's debt to China had been circulating in the media, with this amount purportedly to be in the region of $40 billion.
Pakistan's Ministry of Planning, Development and Reform and the Embassy of China in Pakistan have since released statements clarifying the total value of the aforementioned 22 early harvest CPEC projects completed and under construction to be around $18.9 billion, of which around $6 billion of loans, representing 32% of total value, were provided by the Chinese government and will be repaid over 20-25 years from 2021 at an interest rate of around 2%.
From these statements, it has been noted an improvement in terms of transparency of CPEC projects, with China also providing a breakdown of the type of financing and the estimated investment for each CPEC project.
https://fp.brecorder.com/2019/01/20190129442991/
Fitch believes such a move is a welcoming sign for Pakistan's construction industry as calls for a greater level of transparency over CPEC projects are now being addressed by authorities. This would in turn provide more comfort for potential investors to Pakistan's construction industry.
Furthermore, it has been believed this improved transparency will aid Pakistan's efforts in renegotiation for an IMF bailout deal which, if secured, could provide its ailing economy with much needed economic relief.
In the meantime, it has maintained the real growth rate of Pakistan's construction industry to average at 8.9% over the next 5 years. "We will adjust our forecasts to account possible positive ripple effects across the economy, including the construction industry, in the event an IMF bailout is secured."
Fitch believes political risks associated with CPEC projects have diminished. "Previously, we note that the transition in power from Pakistan Muslim League (Nawaz) to Pakistan Tehreek-e-Insaf (PTI) posed a downside risk to the Pakistani construction industry as new Prime Minister Imran Khan pledged to review Chinese-backed projects, which could potentially have led to project delays and cancellations. However, the political situation in Pakistan has since stabilised and Prime Minister Imran Khan has demonstrated willingness to cooperate with China on multiple issues including CPEC.
"As such, we are in the view that downside risks stemming from political uncertainty are diminishing, and bilateral projects spearheaded by CPEC, will receive a boost in terms of policy implementation and project continuity," maintained the report.
https://www.samaa.tv/news/2019/02/pakistans-trade-gap-reduces-by-more-than-2b/
Pakistan’s trade deficit was recorded at $ 19.26 billion with a 9.66 % reduction during the first seven months of the ongoing fiscal year 2018-19.
Pakistan’s exports remained $13.23 billion, while imports recorded at $ 32.49 billion during July to January 2018-19.
Trade deficit witnessed more than $2 billion reduction during the said period, according to the Pakistan Bureau of Statistics.
Related: Dollar on the rise, reaches Rs139.2
Government is expecting $5 billion to 6 billion reduction in the trade gap at the close of the year, said Commerce Secretary Younis Dhaga.
The imposition of ban on import of furnace oil and increased in regulatory duties on luxury items is yielding positive results as imports witnessed 5.17 % in first seven months, says Abdul Razaq Daud, the adviser to the prime minister on commerce.
The impact of recent rupee depreciation will be witnessed more positive results in exports, he said talking to media in Islamabad.
Overseas Pakistani workers remitted US$ 12774.02 million in the first seven months of FY19
as compared with US$11383.47 million received during the same period in the preceding
year.
During January 2019, the inflow of workers’ remittances amounted to US$ 1743.25 million,
which is 0.3% lower than December 2018 and 6.4% higher than January 2018. The country
wise details for the month of January 2019 show that inflows from Saudi Arabia, UAE, USA,
UK, GCC countries (including Bahrain, Kuwait, Qatar and Oman) and EU countries amounted
to US$ 403.92 million, US$ 352.12 million, US$ 272.32 million, US$ 295.13 million, US$ 166.50
million and US$ 42.89 million respectively compared with the inflow of US$ 383.91 million,
US$ 351.58 million, US$ 223.94 million, US$ 235.10 million, US$ 186.33 million and US$ 56.4
million respectively in January 2018. Remittances received from Malaysia, Norway,
Switzerland, Australia, Canada, Japan and other countries during January 2019 amounted to
US$ 210.36 million together as against US$ 201.46 million received in January 2018.
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https://twitter.com/StateBank_Pak/status/1095276692208267264
In addition, the economy is under less pressure today thanks to the decline in oil prices, which has slowed the pace at which Pakistan was running out of foreign exchange reserves. Pakistan’s currency has also dropped by about 30 per cent against the US dollar since late 2017, making the country’s exports more competitive.
“Today, Pakistan is in a much better place economically than six months ago,” said Taimur Baig, chief economist for DBS in Singapore. “It will be pragmatic and end up taking a little from everyone.”
“Today, everyone is talking to everyone,” added one Pakistani banker. “Pakistan is returning to the diplomatic fold.”
Still, not everyone shares this more optimistic view of Pakistani prospects. Earlier this month, for example, Standard & Poor’s downgraded Pakistan’s long-term sovereign rating to “B-”, citing diminished growth prospects. “While Pakistan has secured financial aid from bilateral partners to address its immediate external financing needs, we believe that fiscal and external imbalances will remain elevated,” the rating agency said.
Some analysts believe it is precisely financial aid from countries such as Saudi Arabia that has kept Islamabad from adopting reform measures that may prove painful in the short run but are necessary for longer-term stability.
“Mideast funds only offer temporary liquidity support. While these could eventually generate both exporting capacity or reduced imports, the short-run impact will not be positive for Pakistan’s external position,” noted Johanna Chua, head of regional economics for Citigroup in Hong Kong in a report entitled “Kicking the Can Down the Road to the IMF”. “Mideast support is allowing the government to take more time to negotiate an IMF programme.”
Pakistan plans reforms in move for IMF aid
Saudi Arabia, however, remains a longtime ally of Pakistan. Pakistan’s army provides 15,000 soldiers to protect its royal family in exchange for $5bn annually, according to Mr Nasr. Moreover, there are about 1m Pakistanis working in the kingdom and hundreds of thousands more scattered throughout the United Arab Emirates and Qatar, whose remittances have helped to narrow Pakistan’s current account deficit in recent years.
Pakistan has only about $8bn in foreign exchange reserves, enough to last it for about two months. The $14bn Saudi Arabia plans to commit includes $6bn in a loan to beef up liquid foreign reserves and in deferred payments for Saudi oil shipments to Pakistan. The remaining $8bn will go towards financing a multibillion-dollar refinery at Gwadar, a coastal city with a deep seaport near the Iranian border, according to senior government officials responsible for monitoring foreign investments in Pakistan.
“They [Saudis] need friends now more than at any other time and Pakistan needs investments,” said retired Major General Mahmud Durrani, a former national security adviser.
Officials say the Chinese government has also promised a grant of $1 billion for education, health, vocational training, drinking water and poverty alleviation projects over the next three years.
Minister for Planning, Development and Reform Makhdum Khusro Bakhtyar said Chinese experts are due to arrive in Islamabad later this month to coordinate socio-economic development under the promised grant.
Pakistan's foreign currency exchange remains under severe pressure, despite receiving around $2 billion from China and $4 billion from Saudi Arabia and the United Arab Emirates in commercial loan deposits.
SBP reserves stood at $8.2 billion last week, barely enough to cover two months' worth of imports.
China's CPEC
In the last six years, China has made significant financial contributions to direct investment, soft loans and commercial deposits to help its close ally, Pakistan, overcome severe economic challenges.
Under its Belt and Road Initiative, Beijing has invested $19 billion in Pakistan to build and improve road infrastructure and power plants and opened the strategic Arabian Sea port of Gwadar. Beijing has also given Islamabad concessional loans for some projects under what is known as the China-Pakistan Economic Corridor (CPEC).
The cooperation deal has created more than 70,000 jobs for Pakistanis and quickly resolved the country's chronic energy crisis. But investments from China had stopped because all major projects under CPEC will be complete by the end of this year.
Chinese and Pakistani officials say preparations are under way to launch the next phase of CPEC in coming weeks to construct nine special economic zones across Pakistan.
Beijing plans to relocate some of its industries by transferring technology to the new industrial zones to help Islamabad increase its exports to overcome its massive trade deficit and shore up cash reserves.
CPEC has "changed the image of Pakistan" and encouraged other countries to invest in the country, notes veteran opposition Senator Mushahid Hussain, who chairs the foreign affairs committee of the upper house of parliament. He praised China for being the only country to bring unprecedented, massive investments to Pakistan five years ago when other nations were reluctant to do so due to terrorism-related security concerns and political considerations.
https://www.washingtonpost.com/world/asia_pacific/pakistan-welcomes-saudi-crown-prince-with-hoopla-and-high-security/2019/02/17/c346b6a6-31f4-11e9-8781-763619f12cb4_story.html?utm_term=.2134852bc792
Saudi Arabia is the one powerful ally on which Pakistan has always been able to rely. The two countries signed a friendship treaty in 1951, just four years after Pakistan was founded as a Muslim homeland. Ever since then, the Saudi monarchy has come to its aid. During earthquakes and refugee influxes, periods of financial distress and diplomatic isolation, the Saudis have stepped up with loans, political support and free supplies of oil.
Millions of Pakistanis work in Saudi Arabia, sending home close to $5 billion in remittances each year. The monarchy has also built a majestic mosque in Islamabad, named after the late Saudi King Faisal, and has long supported seminaries and groups that abetted the rise of ultraconservative Sunni Islam here.
In the past several years, the relationship cooled over the issue of Yemen. Saudi Arabia intervened militarily in 2015 when Yemen’s president was toppled by the Houthi minority movement, and Pakistan remained neutral instead of contributing troops. But this week, Pakistani officials said Mohammed’s visit sent an important sign of revived amity between the two Islamic republics.
Governor of the State Bank of Pakistan Tariq Bajwa has said the country has come out of the financial crisis with the help of friendly countries and the economy has been set on the right path.
Speaking at a private university in Lahore on Monday, he said uncertainty in the economy had ended. The government, he said, was on the right path and it was capable of meeting all economic challenges.
Take a look: ‘Tough measures are necessary to rescue the economy,’ says Hammad Azhar
The governor spoke about the current account deficit, which had hit the economy badly during the current financial year.
The current account deficit was the real cause of concern for the new government headed by Prime Minister Imran Khan. Mr Khan visited friendly countries like China, Saudi Arabia, the UAE, Malaysia and Turkey to seek investment and managed to get financial help to bridge the external deficit.
Mr Bajwa said a plan had been prepared to eliminate the current account deficit and the work in this regard was in progress. He said the deficit was the biggest hurdle for the country and the government was still negotiating with the International Monetary Fund for a package to minimise it.
He said the government had not crossed the limit for borrowing from the SBP. It had borrowed Rs3 trillion from the central bank and returned Rs2tr, he added.
Since the beginning of the new financial year, the government has been borrowing from the SBP for budgetary support, while it has retired loans taken from the scheduled banks. It has so far retired about $2.9tr to the scheduled banks.
The policy shows the government wants to keep the scheduled banks liquid so the private sector could borrow more from the banking system.
According to a latest SBP report, the private sector borrowing has more than doubled from July 1 to Feb 8 to Rs571 billion from Rs264bn in the same period of the last financial year.
The SBP governor said the cases involving Rs600bn were pending in banking courts. He said capacity building was being developed to deal with the huge number of pending cases and for their quick decisions.
He said the cases must be decided quickly so that the banks could use the money involved in litigation.
Mr Bajwa said the SBP had offered to bear expenses of training of judges to help the courts decide the pending cases urgently.
He said the policy to depreciate the rupee had been adopted to reduce the trade deficit, which was the main reason for high current account deficit.