Current Debt Crisis Threatens Pakistan's Future

Pakistan is battling massive twin deficits, deteriorating foreign currency reserves, low exports, diminishing tax revenues, a weak currency, unsustainable external debt payments, and soaring sovereign debt. This crisis has forced the country to seek IMF (International Monetary Fund) bailout, the 13th such request in Pakistan's 72 year history.

Pakistan Debt Service: Source SBP
Pakistan's debt repayment costs rose to $5.4 billion for first half of fiscal 2019 ( July 2018-Dec 2018), up from $7.5 billion for the entire fiscal 2018 (July 2017-June 2018), according to the State Bank of Pakistan. At this rate, the total debt service cost for current fiscal 2019 will exceed $11 billion, adding to the nation's debt crisis.

Pakistan's External Debt. Source: Wall Street Journal

This $11 billion debt service cost will add to the projected trade deficit of nearly $40 billion for the current fiscal year. How can Pakistan fund this balance of payments deficit of about $50 billion? Remittances of $21 billion in current FY2019 from Pakistani diaspora are expected to reduce it to $30 billion. PTI government has taken on billions of dollars in loans from Gulf Arabs and China. Given the low rates of foreign investments in the country, a big chunk of the remaining deficit will have to be met by borrowing even more funds which will further increase future debt service costs.

Pakistan's Current Account Deficit. Source: Trading Economics

As a result, Pakistan is now battling massive twin deficits, deteriorating foreign currency reserves, low exports, diminishing tax revenues, a weak currency, onerous external debt payments, and soaring sovereign debt. This crises has forced the country to seek IMF (International Monetary Fund) bailout, the 13th such request in Pakistan's 72 year history.

In the short term, PTI government's efforts are beginning to pay off. The current account deficit (CAD) in first 8 months of FY2019 (July-Feb 2018) declined to $8.844 billion, down 22.5%, from $11.421 billion in same period last year, according to SBP as reported by Dawn newspaper.

However, Pakistan's economic woes are far from over. The country's twin deficits are structural. Its exports and tax collections as percentage of its GDP are among the lowest in the world. British civil society organization Jubilee Debt Campaign conducted research in 2017 that showed that Pakistan has received IMF loans in 30 of the last 42 years, making this one of the most sustained periods of lending to any country.

History of Pakistan's IMF Bailouts

Pakistan needs to find a way to build up and manage significant dollar reserves to avoid recurring IMF bailouts. The best way to do it is to focus on increasing the country's exports that have remained essentially flat in absolute dollars and declined as percentage of GDP over the last 5 years. Pakistan's economic attaches posted at the nation's embassies need to focus on all export opportunities in international markets and help educate Pakistani businesses on the best way to take advantage of them. This needs to be concerted effort involving various government ministries and departments working closely with industry groups. At the same time, the new government needs to crack down on illicit outflow of dollars from the country.

Azad Labon Ke Sath host Faraz Darvesh discusses Imran Khan's challenges with Misbah Azam and Riaz Haq (www.riazhaq.com)

https://youtu.be/CQ41Qt_2XQM




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Comments

Selena Inc. said…
Hopefully, this should not come as a shock. In South Asia, Pakistan is mainly a rent seeking state and what follows is investments based on that. Sure, some of it goes elsewhere but most of it is to enhance itself as a security state. The military skims off 20% of the budget every year no question asked. I would be wary to invest in Pakistan. Yes the stock market does well but lot of speculation there.

The balance of payment problem will remain cyclical for some time to come.
Riaz Haq said…
#Pakistan #textile industry now operating at full capacity & adding capacity to grow #exports. A big textile group is eyeing its sales to grow by around 20% in the next two years, but is expecting all the increase in sales to come from #exports. #economy https://www.brecorder.com/2019/04/16/489570/betting-long-on-textile-exports/

The ministry of finance sources are expecting textile exports to grow to $7-7.5 billion in the April-June quarter – average monthly exports of $2.3-2.5 billion versus $2.0 billion in Jul18-Feb19, and $2.2 billion in Apr18-Jun18. Although industry players are not too bullish on immediate off-take, they certainly are seeing significantly high numbers in 2-3 years. For details read “Textile ready to take off“, published on 14th December 2018.


One big textile group is eyeing its sales to grow by around 20 percent in the next two years, but is expecting all the increase in sales to come from exporting. On the flip, the higher concentration of sales growth in the past five years was in domestic sales. That is the story of a big player, which is reaching a size where big expansions are hard to come by without resolving the issues of basic raw material – cotton.
However, there are many other companies that have the potential to grow at a much higher pace because of their relatively smaller size. The positive sentiments are across the board where many players are aggressively expanding. The potential is in value addition. There are multiple reasons for exuberance – currency devaluation, subsidy to textile, and availability of energy at regional competitive rates are known to all.
One big booster is improvement in perception. The overall image of the country is improving and the opening up of visa regimes is helping as well. The buyers are visiting and new orders are being placed, and there is soft commitment of new businesses, given that the expansions are carried out.
The textile exports, in volume terms, stopped growing, in the last decade. The problem of currency overvaluation is more of a recent phenomenon – started in 2014. Prior to that, energy and security started hitting the exports bad. Enough has been said on the energy, and its availability is paying dividends.
The perception improvement needs to be highlighted. The textile and other exporters swayed away from exporting to domestic sector, before the currency was capped by Dar. Buyers were not coming and it was hard to get new business. There were fears of getting shipment delayed from Pakistan and that had helped Bangladesh to grow.
Now the situation is changing. If the travel advisory from the US is relaxed, it would be a game changer for Pakistan exports – be it in goods or services. With recent tariff war between US and China, and protests against low wages in Bangladesh, buyers are thinking to diversify from these two markets. Pakistan has the opportunity to grab its lost share.
However, building requisite backward linkages are required. Three big textile players resonated that without enhancing cotton production, it is hard for textile industry to reach its true potential. One of the reasons for competitiveness erosion is fall in cotton production, which has reduced from its peak of 14-15 million bales per annum to around 10 million bales.
The long term strategy should be to take annual cotton production to 20 million bales in 5 years or so. The need is to work on our agriculture strength. The cotton seed market is orphan today with too many kids on the street – every district has multiple unregulated seed companies. The stewardship is missing. Industry players are of the opinion that the seed industry needs to be regulated and serious consolidation is required to improve the yield. The other factor is to do away with price support to other crops – such as sugarcane, which has resulted in substitution to sugarcane from cotton
Riaz Haq said…
Textile ready to take off
BR ResearchDecember 14, 2018
The currency has depreciated over 30 percent in last 12 months but textile exports grew by a mere 6 percent during Nov17-Oct18 over the same period last year. This implies that currency adjustment alone is not sufficient to boost exports.

https://www.brecorder.com/2018/12/14/459105/textile-ready-to-take-off/

Pakistan textile exports grew by 85 percent from $5.8 billion to $10.8 billion during FY02-07 at a time when currency and cotton prices were sticky. Since then, there has been no significant growth in textile exports during the last decade, despite the fact that the value of dollar has more than doubled against the rupee during the same period. FY11 was the only exception when textile exports jumped by 34 percent due to over 100 percent increase in cotton prices during that year.

Turning around stunted growth in textile exports requires more than just currency depreciation Yes, there are advantages of recent currency adjustments; but given the capacity constraints of value added sectors, growth may remain restricted to 5-10 percent this year.

In order to go beyond, textile industry needs to significantly increase its capacity as it happened during 2002-06. No significant sector wide expansion has been recorded in the industry during the last decade which could have led to a exportable surplus. It appears that stars have aligned for significant expansion in textile over coming periods: government has set the price for gas at 6.5 cents per unit and electricity at 7.5 cents per unit, is providing long term financing at attractive rates, and is seemingly committed to flexible exchange rate. These factors are making players to seriously consider massive expansions. It takes a year or two for the industry to expand and for that process to kick start more clarity is needed in implementation, and a few more incentives are warranted.

For example, the government has to do away with 0.25 percent tax for export development fund which is wasted in TDAP and other such nuisances, and refunds of exporters need to be cleared sooner or later. Anyhow, the direction is right.

Another major impediment is the falling cotton production in the country. Back in FY05, cotton production peaked at 14.3 million bales which was aligned with industry expansion. Cotton production has been downhill since; averaging at 12.7 million bales per year during FY06-15, before further spiraling downward to average annual production of 10.8 million bales by FY16-18.

One reason for recent dip is the shift of cotton production area to sugarcane which is due to undue incentives for sugarcane production in the form of support price mechanism. Per hectare yield has also deteriorated substantially over the same period. For context, yield in Indian Punjab is around 50 percent higher than Pakistani Punjab, even though domestic yield was not far behind as recent as in FY12.

The major problem is in cotton seed research which is poor in Pakistan. Three big textile players (Nishat, Sapphire and Fatima) have formed a cotton seed company (Safina) to resolve the problem. Such interventions can resolve the problem of germination and purification of seeds; but without stewardship of a global player such as Bayer (ex Monsanto), resistance against pesticides and other harming elements cannot be developed. India, Brazil, US and many other economies have done it; it is time for Pakistan to move towards GMOs in cotton production.
Riaz Haq said…
#China to offer #Pakistan Asean-like market access. #Beijing has also agreed to immediately cut tariff to zero on 313 exports from Pakistan. New #FTA to be signed during the upcoming visit of Prime Minister #ImranKhan to Beijing later this month. #economy https://nation.com.pk/17-Apr-2019/china-to-offer-pakistan-asean-like-market-access

Advisor to Prime Minister on Commerce and Textile Abdul Razzak Dawood on Tuesday said that China has agreed to offer Pakistan its market access similar to that offered to countries of Association of South East Asian Nations (Asean) on Islamabad’s demand.

He further said that Chinese government has also agreed to immediately reduce duties to zero percent on 313 tariff lines. Pakistan and China would sign the second phase of Free Trade Agreement (FTA) during the upcoming visit of Prime Minister Imran Khan to Beijing later this month, the Advisor to Prime Minister said in National Assembly Standing Committee on Commerce and Textile. He said that the second phase of FTA fell into internal politics of China, as some of their Ministers were not in favour to revise the trade agreement with Pakistan. However, Chinese Prime Minister and Foreign Minister were in favour. However, the Chinese government had accepted our main demand of giving market access similar to that offered to countries of Asean, he added.

Dawood said that Turkey is not ready to give any incentive to Pakistan for exporting its textile and leather products. Turkey had imposed 27 percent duty on Pakistanis products. He further said that Afghanistan has destroyed Pakistan’s trade. The government is working to discourage the smuggling. He expressed hope that Pakistan’s exports would increase to China, Indonesia, Bangladesh, Afghanistan, and Turkey due to the policies of the incumbent government.

The 4th meeting of the Standing Committee on Commerce and textile was held under the chair of Syed Naveed Qamar MNA. The officials of the ministry of commerce informed the committee that government has successfully increased the exports and reduced the imports during ongoing fiscal year. The committee was told the imports had reduced by 8 percent in first eight months (July to February) of the ongoing fiscal year while exports had gone up during the same period.



Secretary of Ministry of Commerce Sardar Ahmad Nawaz Sukhera briefed the Committee in detail on the exports of Pakistan. The committee was informed that Pakistan’s exports were declining during the period 2014-17. However, the exports had started increasing during the ongoing fiscal year due to the government’s policies. There is need for enhancing export competitiveness components particularly in the areas i,e PM’s Package, zero rating of 5-export sectors, rationalization of energy costs for export sectors, exemption of export sectors from load shedding, tariff rationalization on raw material and intermediate products. In new policy initiatives, strategic trade policy frame work 2019-24, national tariff policy, trade related investment policy framework and regulatory reforms may be revisited for future improvements and growth of export and decline in import. On WTO, Secretary informed the committee about the Structure and functions, current issues faced by the Pakistan, the basic principles of trade were briefed in detail along with advantages of WTO. The Multi-trade agreements, dispute settlement Body, reforms, transparency and the role of E-Commerce and norms of trade facilitation agreement (TFA) briefed to committee.
Riaz Haq said…
#Pakistan All Set To Cross USD 15 billion Mark In #Textile #Exports. “The textile industry exports is likely to cross $15 billion mark in case it continues to grow by 10 percent on an average for the remaining period of current fiscal.
https://www.textileexcellence.com/news/pakistan-all-set-to-cross-usd-15-billion-mark-in-textile-exports/


Gohar Ejaz, patron in chief of APTMA (All Pakistan Textile Manufacturers Association) stressed that the availability of energy at regionally competitive price has boosted textile exports by 8.5% in the month of January 2019 on a y-o-y comparison in the corresponding period.

“The textile industry exports is likely to cross $15 billion mark in case it continues to grow by 10 percent on an average for the remaining period of current fiscal. It would likely be a record achievement of textile exports in such a short span of time. The exports of USD 3.5 billion yarn and fabric annually may boost textile exports to USD 14 billion in case closed capacity worth USD 3 billion exports is revived through the enablers ensured by the government,” pointed out Ejaz.

Riaz Haq said…
THE EXPRESS TRIBUNE > BUSINESS
Interloop to raise Rs4.9b at PSX this week

https://tribune.com.pk/story/1927532/2-interloop-raise-rs4-9b-psx-week/

Interloop Limited – the world’s largest socks exporter based in Faisalabad with Puma, Nike and H&M among its big clients – is set to raise record financing in the private sector at the Pakistan Stock Exchange (PSX) this week.

It is estimated to raise a minimum of Rs4.9 billion through the sale of 109 million shares at the bidding price starting from Rs45 per share, which may go to Rs63 during the two-day book-building process on Wednesday and Thursday.

Corporations and high net-worth individuals will participate in the bidding to find a strike price, at which the shares will be sold to them and later to the general public at the same price. The company will be listed at the PSX in the second week of April.

“The financing to be raised through book building and IPO (initial public offering) will be invested in expansion of hosiery production and setting up a new plant for (stitched) denim jeans,” Shahid Ali Habib, CEO of Arif Habib Limited, the IPO consultant, told The Express Tribune.

Senior associate investment banker at the consultant firm Dabeer Hasan added that Interloop Limited produced 50-55 million dozen of socks a year at its existing four hosiery plants – three in Faisalabad and one in Lahore.

Besides, it is also running an associate hosiery firm in Bangladesh. The world’s largest socks exporter, having 3.5-4% market share in global socks supplies, is aimed at setting up another hosiery plant in Faisalabad and a stitched denim jeans plant in Lahore, he said.

Interloop emerged as the top global supplier of hosiery after a former top Chinese exporter diverted sales to the domestic market recently, he added.

“The expansion is estimated to cost a total of Rs11.2 billion. This includes (a minimum) Rs4.9 billion through the sale of shares at the PSX,” Hasan revealed.

Besides, it has already raised a debt of Rs2.8 billion from Habib Bank Limited (HBL) for the expansion. “The expansion projects are expected to come on line in the next two years. So as and when the firm will feel the need for required gap funds, it may utilise internal resources or may take loans from banks,” he said.

The company is expanding production, keeping in view growing demand from around the world in hosiery segment, while it is sharing its stitched denim designs with its clients including Levi’s and H&M these days, said the senior associate.

“Interloop is not only in talks with its existing customers, but is also approaching new customers for its denim range. Given the global growth forecast in both hosiery and denim segments and the overall growth forecast in the garment industry, Interloop is positioned to add to its long-term growth in revenue and market share,” the company stated in its prospectus.

Habib said the company posted a profit of Rs2.2 billion in the first half (July-December) of current fiscal year 2018-19. It had recorded a profit of Rs3.8 billion in FY18.

“The company is offering shares for sale at a price (Rs45 per share), which is equivalent to 7.9 times of earnings per share (EPS) for FY19 and 6.5 times of FY20,” he said, adding it was going to be the first listing at the PSX in 2019.

Out of the total 109 million shares allocated for sale during the IPO, the company would sell 75% (or 81.75 million shares) to institutional investors and high net-worth individuals and 25% (27.25 million shares) to retail investors.
Riaz Haq said…
#Pakistan #trade deficit at $23.67 billion, down 13% in 9 months of current FY19. #Exports up 0.11% to $17.08 billion. #Imports down by 7.96% to $40.75 billion. #Textile exports flat at $10 billion. #Petroleum imports #10.6 billion, up 3.81%. https://nation.com.pk/19-Apr-2019/textile-exports-unchanged-at-9-99b

Pakistan’s textile exports were recorded at $9.99 billion during nine months (July to March) of the ongoing fiscal year. The country’s textile exports had remained at the same level of previous year, showing no growth. The incumbent government had provided several incentives to the five exports oriented sectors including textile to enhance the country’s exports. The government had depreciated the currency and reduced the prices of electricity and gas but it failed to achieve the desired results.

The data released by PBS showed that country’s overall exports had increased by only 0.11 percent to $17.08 billion during July to March period of the year 2018-19. The major chunk of the overall exports is from the textile sector, which remained at $9.99 billion. Exports from all other sectors are only $7.09 billion during nine months of the ongoing fiscal year.

In textile sector, according to PBS, exports of knitwear had enhanced by 9.29 percent during July to March period of the year 2018-19 over a year ago. Similarly, exports of bed wear had also recorded an increase of 2.69 percent and exports of made-up articles had gone up by 1.26 percent. Meanwhile, exports of ready-made garments had also surged by 2.02 percent in first nine months of the current financial year. The PBS data showed that exports of cotton cloth had recorded a decline of 2.09 percent. Similarly, exports of raw cotton had tumbled by 71.84 percent. Exports of cotton yarn witnessed decrease of 15.44 percent. Meanwhile, exports of towels had declined by 1.85 percent.

Meanwhile, the exports of food commodities had recorded decrease of 2.4 percent during first nine months of the current fiscal year. In food commodities, exports of fruits recorded growth of 8.66 percent, vegetables exports declined by 2.48 percent and oil seeds, nuts and kernels exports had gone up by 117 percent. Similarly, the exports of petroleum group and coal had enhanced by 21.52 percent during July to March period of the ongoing fiscal year.

Imports

The country’s imports had gone down by 7.96 percent to $40.75 billion during the nine-month period (July-March 2018/19) over the same period of the last financial year.
The country spent $10.6 billion on the imports of petroleum group, 3.81 percent higher than a year ago. In the petroleum sector, the government imported petroleum products worth $4.62 billion and spent $3.38 million on petroleum crude. Similarly, the country imported liquefied natural gas (LNG) worth $2.4 million and liquefied petroleum gas (LPG) worth $207 million.

The PBS data showed that country had spent $6.74 billion on importing machinery during July and March period of the ongoing fiscal year. The third biggest component was food commodities whose imports rose to $4.26 billion during first nine months of the ongoing financial year.

Trade deficit

The country’s trade deficit was recorded at $23.67 billion during nine months of the current financial year as against the deficit of $27.21 billion during corresponding period of the previous year. This depicts 13.02 percent or ($3.54 billion) reduction in the deficit.

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