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'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.
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.
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.
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
Related Links:
Haq's Musings
South Asia Investor Review
Pakistan's Debt Crisis
Can Pakistan Avoid Recurring IMF Bailouts?
Pakistan is the 3rd Fastest Growing Trillion Dollar Economy
CPEC Financing: Is China Ripping Off Pakistan?
Information Tech Jobs Moving From India to Pakistan
Pakistan is 5th Largest Motorcycle Market
"Failed State" Pakistan Saw 22% Growth in Per Capita Income in Last 5 Years
CPEC Transforming Pakistan
Pakistan's $20 Billion Tourism Industry Boom
Home Appliance Ownership in Pakistani Households
Riaz Haq's YouTube Channel
PakAlumni Social Network
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| Pakistan Debt Service: Source SBP |
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| 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.
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| 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.
 |
| Pakistan Debt as Percentage of GDP. Source: Trading Economics |
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.
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| Pakistan's Debt Burden Highest Among 25 Emerging Nations |
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.
 |
| Pakistan Debt Service as Percentage (45%) of Budget Among World's Highest |
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
Related Links:
Haq's Musings
South Asia Investor Review
Pakistan's Debt Crisis
Can Pakistan Avoid Recurring IMF Bailouts?
Pakistan is the 3rd Fastest Growing Trillion Dollar Economy
CPEC Financing: Is China Ripping Off Pakistan?
Information Tech Jobs Moving From India to Pakistan
Pakistan is 5th Largest Motorcycle Market
"Failed State" Pakistan Saw 22% Growth in Per Capita Income in Last 5 Years
CPEC Transforming Pakistan
Pakistan's $20 Billion Tourism Industry Boom
Home Appliance Ownership in Pakistani Households
Riaz Haq's YouTube Channel
PakAlumni Social Network
Comments
The balance of payment problem will remain cyclical for some time to come.
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
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.
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.
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.
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.
Pakistan’s ll major industrial sectors attracted considerably high foreign direct investments (FDI) during the current financial year indicating an attraction for industrial growth in near future.
The country’s key industries such as textile, chemicals, pharmaceuticals, and electrical machinery saw their inflows jumping by 50-800 per cent.
However, the overall FDI plunged by 51pc during the first nine months of 2018-19 mainly due to outflow of Chinese investments from the local power sector, which in turn eroded the positive impact on inflows in the major industries. Outflow of Chinese investment during the period was $294 million, as compared to net inflow of $929m in same months of last fiscal year.
The highest inflows were recorded in electrical machinery, which attracted $126.6m during 9MFY19 as against $13.8m in corresponding period last year, reflecting an increase of 813pc.
Transport sector came in second as inflows into the sector jumped by 663pc to $84.3m, led by FDI worth $89.6m in cars whereas buses, trucks, vans and trails posted a $5.3m outflow.
Similarly, inflows in chemicals soared by 322pc to $113.9m during 9MFY19 versus $27.6m in same period of 207-18 while those in pharmaceutical rose 274pc to $55m from $14.7m.
The FDI in textile sector clocked in at $54m during the nine-month period, up 50pc over $36.6m in corresponding months of FY18. The sector earns over 60pc of all export proceeds for the country.
For the last couple of years, only two sectors – power and construction – have found themselves on the radar of investors while the rest have seen limited activity in terms of inflows. If latest data is to serve as an indicator for reversal, it could help boost sentiments in the local industry.
Power sector saw a steep decline in FDI as it recorded a net outflow of $293m in 9MFY19 as against $929m in corresponding period last year. Construction also seems to be ceding its gains with inflows shrinking steeply as investment in the sector slowed down to $385.4m, from $527m.
Communications saw a net outflow of $141m, led by telecommunications which recorded outflows worth $157
The country’s oil import bill went up 3.8 per cent year-on-year to $10.6 billion during 9MFY19, from $10.22bn in same period last year, according to data from the Pakistan Bureau of Statistics (PBS).
The rise in imported value of the petroleum group was led by surge in liquefied natural gas, higher by 49.3pc and crude oil 15.19pc. On the other hand, cost of petroleum product dipped 15.33pc during the nine-month period, whereas a 33.9pc decline was recorded in terms of the quantity imported, bringing the total down to 7.57 million tonnes.
The overall import bill during July-March FY19 fell by 7.96pc year-on-year to $40.75bn, leading to a 13pc decline in trade deficit to reach $23.67bn.
Barring petroleum and agriculture groups, all other categories saw their value of imports shrink during the period under review.
Food imports contracted 9.92pc to $4.73bn during July-March 2018-19, from $4.26bn in corresponding months last year. This decline was largely due to a 10.22pc fall in the value of palm oil, which decreased to $1.39bn in 9MFY19, from $1.54bn.
Import bill of the machinery clocked in at $6.74bn during the nine months, lower by 20.54pc, from $8.48bn in same period last year. The biggest contributor to the decrease was power generating machinery, which plunged by 49.09pc, followed by 17.26pc contraction is electrical and 8.86pc in telecom.
Similarly, transport group — another major contributor to the trade deficit – also receded during July-March FY19 as it posted a 35.7pc decline, with decrease in imported value of almost all sub-categories.
On the other hand, agriculture imports inched up by 1.6pc to $6.58bn, from $6.47bn on the back of 16.49pc increase in fertiliser, 13.32pc insecticides and 7.31pc medicinal products.
Textile exports inch up
The textile and clothing export proceeds posted a paltry growth of 0.08pc year-on-year to $9.991bn during 9MFY19, as against $9.983bn in same period last year.
Product-wise details show that exports of ready-made garments went up by 2.02pc, knitwear 9.29pc, bedwear 2.69pc while those of towels declined 1.85pc and cotton cloth 2.09pc.
Among primary commodities, cotton yarn exports dipped by 15.44pc, yarn other than cotton by 3.23pc, raw cotton 71.84pc whereas made-up articles — excluding towels — increased by 1.26pc and tents, canvas and tarpaulin gained 3.49pc in value during the period under review.
The slow growth in textile and clothing exports comes despite government’s support in the form of cash subsidies, special export packages and multiple rupee depreciations during the last year.
Source: Dawn
Pakistan on Thursday welcomed $6bn bailout package approved by the executive board of the International Monetary Fund (IMF), saying it would lead to inflows of $38bn from other lenders in three years.
Read: IMF approves $6 billion loan for Pakistan
Speaking at a hurriedly called news conference, PM’s Adviser on Finance and Revenue Dr Abdul Hafeez Shaikh said the approval of 39-month reform programme by the IMF executive board without opposition from any member would provide stability to Pakistan. “The board has given us trust to prove ourselves good partners and deliver on reform promises,” he said.
He said this had improved the country’s standing and other institutions had also started extending their financial support. He said the Asian Development Bank would disburse about $2.1bn out of $3.4bn agreed funds to Pakistan this year and the World Bank had also agreed to additional assistance purely for budgetary support. Discussions with the World Bank were in progress for assistance only for the purpose of government expenditure, he said.
Giving a breakdown of $38bn expected financial support from lenders other than IMF, Dr Shaikh said about $8.7bn funds had been lined up against project loans, $4.2bn for programme loans, about $14bn of rollover loans and up to $8bn in commercial loans. He did not go into details and sources of these loans.
Responding to a question, he said Pakistan’s outflows for debt-servicing amounted to $9.5bn during the last financial year and projected at $11.8bn during the current fiscal year.
The adviser said there had been different exaggerations and unfair comments about IMF conditions while the government was in talks but it would also become clear as to what are the conditions when the IMF releases full details of the programme.
He said the government decision to enter into the IMF programme was a message to the world and other lending agencies that Pakistan was serious and ready to prove its responsibility towards managing expenditures, enhancing revenues and taking difficult decisions while protecting the vulnerable segments.
Dr Shaikh said there was also no condition or IMF demand in the programme about the privatisation as it would become clear from the documents to be released by the Fund. Instead Pakistan has to develop a comprehensive programme to decide which loss making entities could be improved and run in the public sector, which can be better run by the private sector and which require liquidation.
Pakistan has said this programme will be completed by September 2020, but there was also a possibility that we finalise the restructuring plan before this target. This is because these entities are a direct burden on the public finance and should be tackled at the earliest and if the Pakistan State Oil and Pakistan International Airlines are not being run in an efficient manner then this is not in the interest of our people.
The adviser said what should matter to all was that the IMF was an international institution from whom Pakistan could secure financial support and by taking benefit from this fiscal space set the stage for sustainable reforms in the long-term interest of the people and the country and ensure how to learn lesson from the past and not to repeat mistakes.
He said the government had given independence to the State Bank of Pakistan so that it emerged as a strong institution like others in the world.
Owing to business friendly policies adopted by the incumbent government to boost exports, current account deficit fell by 32 per cent during the current fiscal year, ARY News reported.
The Statistics Division has reported that the current account deficit (CAD) fell to $13.59 bn during the fiscal year-2018-19, decreasing by 32 per cent, from $19.90 bn in the same period last year.
Earlier on June 16, Adviser to Prime Minister on Finance, Revenue and Economic Affairs Dr. Abdul Hafeez Shaikh had said that due to effective measures taken by the government ,current account deficit had shirked to $7 billion during past few months.
Addressing a post budget conference, ‘Pakistan Back on Track’ in Islamabad, Hafeez Shaikh had said that the current government had inherited $20 bn current account deficit and it required 2000 billion rupees for debt servicing.
The advisor had said that the government was striving hard to overcome the fiscal and current account deficit to stabilize economy.
https://twitter.com/haqsmusings/status/1261095545528958976?s=20
Worldwide Currency Usage and Trends
Information paper prepared by SWIFT in collaboration with City of London and Paris EUROPLACE
December 2015
This paper analyses a range of previously unpublished SWIFT messaging flows to address key questions on how currency usage in global payments is changing, namely:
— What are the top currencies used in international trade?
— What is the UK’s role in currency flows between Europe, Asia-Pacific and the Americas?
— What are the major currency flows with Europe, excluding the UK?
— What are the drivers or incentives determining the use of a particular currency?
— Are there regions or countries where the use of local currencies could grow?
The US dollar prevails as the dominant international trade currency, with a 51.9% share of the value
of international currency usage in 2014. The euro is second, with a 30.5% share of the total value. The British pound is third, with a 5.4% share of
the total value, followed by Asian currencies such
as the Japanese yen and the Chinese yuan. While accounting for a relatively small proportion of worldwide international currency usage, the Chinese yuan (CNY) or renminbi (RMB), is nonetheless experiencing a stellar ascension, as evidenced by the SWIFT monthly RMB Tracker3. At the time of writing this paper, SWIFT data shows the RMB is currently ranked fifth for Asia-Pacific inflows and outflows with Europe, excluding the UK4.
The analysis of current financial flows (bank-to- bank flows) does not fully reflect the global reach of commercial flows (customer-to-customer flows). Many import and export settlements involve intermediation by banks that are based
in established financial centres. As such, the importance of US dollar clearing banks in the United States, reflecting the prevalence of the US dollar in international trade, and the importance of
the UK as a payments intermediary for euro flows, continues to be reflected in SWIFT statistics.
Looking at financial flows in value, the UK is the main correspondent country within Europe for Americas and Asia-Pacific, regardless of the currency. UK financial institutions process more than 50% of all European inflows and outflows with the Americas and Asia-Pacific.
For commercial flows denominated in the euro or in Chinese yuan, UK-based banks also play a significant role, intermediating flows to and from Europe.
The British pound’s ranking in third position, and the scale of its usage on a worldwide basis, is reflective of the UK and specifically London’s role as a centre of financial market activity. However, for financial flows where the UK is not involved, the British pound’s share is very small. In contrast, for euro financial flows that take place outside
of the Eurozone, the euro’s share compared to other currencies is more significant. This highlights the geographical spread of euro-denominated payments.
The Chinese yuan’s usage continues to grow significantly, particularly in flows between Europe and Asia-Pacific, which have increased considerably over the last two years, and where the currency is now ranked fifth. The People’s Bank of China (PBOC) demonstrates a strong commitment to promoting the internationalisation of the Chinese yuan, and the Chinese government has implemented a range of supportive policy measures.
In contrast, the European Central Bank (ECB)
has not pursued the same internationalisation
strategy with the euro. Its focus has been on
regional stability rather than expanding the euro’s
international commercial usage, as noted in the
ECB’s July 2015 report ‘The international role of the
5 euro’ .
https://www.dawn.com/news/1534956
The government is estimated to have collected almost 43.7 per cent higher revenue on key oil and gas products during the first half of this fiscal year than the same period last year despite over 10pc drop in domestic production and 20pc fall in imports, it emerged on Sunday.
Data released by the finance ministry puts the total revenue collection from seven important oil and gas products at Rs205bn in six months (July-December 2019) compared to Rs151bn of the same period in 2018, showing about 35pc increase. In addition, energy ministry officials put another Rs160bn collection as General Sales Tax (GST) on oil products in the first half of the current fiscal year compared to Rs103bn of the same period last year, showing an increase of over 55pc.
As the total revenue from only these eight heads amounted to Rs365bn in July-Dec 2019 compared to Rs254bn of July-Dec 2018, indicating an increase of about 43.7pc, the oil and gas sector is emerging as the single largest contributor to the country’s revenue stream.
Three major factors are estimated to have contributed to the surge in petroleum revenues including a substantial increase in various tax rates, removal of legal challenges and higher international prices.
These estimates do not include provincial tax collections through oil and gas and taxes arising out of value addition to oil products, for example the power generation that is almost 70 per cent dependant on furnace oil, liquefied natural gas and natural gas. Also, the revenue on sale of natural gas and LNG to consumers is also not part of these estimates.
According to the data released by the finance ministry, the collection of petroleum levy on various oil products increased by almost 69pc in six months during the current fiscal year than the first half of last year, as the government collected Rs138bn in July-Dec 2019 compared to Rs82bn in July-Dec 2018. Likewise, the natural gas development surcharge also increased by 51pc to Rs4.6bn in six months this year compared to Rs3.037bn last year.
However, the government reduced the gas infrastructure development cess (GIDC) by about 56pc. The GIDC collection thus dropped from Rs11.45bn during the six months of last fiscal year to as low as Rs5.03bn during the first half of this financial year.
The government collected about Rs44bn worth of royalty on oil and gas during six months of current fiscal year, showing an increase of about 5.3pc over Rs41.8bn of same period last year. Similarly, discount retained oil and gas in first half of current year contributed about Rs7.2bn to the national exchequer when compared to Rs6.5bn of same period last year, up 11pc.
This was despite the fact that production of petroleum products in the first half of the current year dropped by 10.33pc to about 6.8bn litres when compared to about 7.6bn litres of the same period last year, according to the Pakistan Bureau of Statistics (PBS). The bureau reported that production of two major projects — petrol and high speed diesel — dropped by about 9pc and 10pc respectively — a sign of slower economic activities in the country.
Also, the PBS reported about 20pc reduction in oil imports during the first half of the fiscal year in dollar terms and about 2.75pc fall in value of Pakistani rupee. The total oil import bill has dropped from $7.66bn in July-Dec 2018 to $6.14bn in July-Dec 2019.
The import value of petroleum products dropped from $3.4bn to $2.59bn during the period under review, showing a 24pc drop. The value of crude imports also fell by 27pc to $1.77bn in the first half of the current fiscal year when compared to $2.43bn of the same period of last financial year.
The imports of petroleum products and crude oil in terms of quantities also reduced by 13pc and 14pc, respectively, during the first six months of this fiscal year.
https://www.dawn.com/news/1599538
The settlement scheme covers the 50-odd IPPs which were set up in the 1990s and 2000s and had consented to the alterations proposed in their power purchase deals with the government. The majority of these plants have completed their life cycles or paid off their debts. Therefore, we should not expect an immediate resolution of the circular debt problem even after materialisation of the revised deals with the IPPs. In recent years, the major build-up in the circular debt has been caused by capacity payments to large power projects set up since 2015, primarily as part of the multibillion-dollar CPEC initiative, with Chinese money. So far, no progress has been made to get the terms of the PPAs with these companies renegotiated although we are told that contacts have been made with Beijing at the highest level. Until these contacts pay off, the resolution of the mounting power-sector debt will have to wait.
https://twitter.com/haqsmusings/status/1408212855741030400?s=20
Interest payments consume one-third of Pakistan's budget
Over-reliance on loans bodes ill for fiscal sustainability and domestic needs
https://asia.nikkei.com/Economy/Interest-payments-consume-one-third-of-Pakistan-s-budget
Fiscal sustainability has become a major issue among political and economic analysts after Pakistan revealed early this month that servicing debt accounts for more than one-third of its federal budget.
Finance Minister Shaukat Tareen in the National Assembly on June 12 announced the fiscal 2021 federal budget of 8.48 trillion rupees ($54 billion). Interest payments on debt, which are expected to grow by 3.9% from the ongoing fiscal year, account for 3.06 trillion rupees, or 36% of budget expenditures. In contrast, the government is only spending 600 billion rupees on subsidies and 100 billion rupees for COVID-19 vaccinations and emergencies.
The budget also reveals a deficit of 3.99 trillion rupees. The federal government plans to borrow 3.74 trillion rupees to finance this deficit, which makes up 94% of the deficit.
Pakistan's reliance on debt is a violation of the country's Fiscal Responsibility and Debt Limitation Act 2005, which states that the government must limit debt to 60% of gross domestic product. Currently, the ratio stands at 78% of Pakistan's $303 billion GDP.
Hasaan Khawar, a public policy analyst based in Islamabad, says Pakistan borrows heavily not only to finance current expenditures but also to service existing debt. "Pakistan is a having a primary fiscal deficit. That's why the [International Monetary Fund] has been demanding a primary budget surplus so that it starts reducing debt."
"Resources that could have been spent on essential sectors like health, education or public investment are now being dedicated to interest payments," said Naafey Sardar, a senior research associate at Texas A&M University in the U.S., emphasizing that increased debt financing presents a trade-off for Pakistan. "Since increased public investment and expenditures on education and health are associated with improvements in economic growth, higher debt financing expenditures reflect a missed opportunity," he said.
Of the 3.06 trillion rupees earmarked for interest payments on debt, 2.76 trillion rupees, or 90%, will go toward servicing domestic debt.
A senior official involved with the government's development planning told Nikkei on condition of anonymity that domestic borrowing is unsustainable. "Domestic borrowing is always at high commercial rates and external borrowing is mostly at concessional rates. That's why domestic borrowing costs the economy more," the official said.
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Experts believe that a combination of reduced government spending and a tax increase is the solution.
Sardar believes that the way out is to increase tax revenue. "Higher tax receipts can be earned by increasing the corporate tax rate from 29% to 35%," he said. Sardar added that at a time when corporate profits are surging, increasing corporate taxes could be a viable option.
Khawar believes that Pakistan can accrue surpluses by controlling fiscal waste. He says there is a multipronged strategy to deal with the problem. "Government needs to widen the tax base using technology for tax enforcement while reducing expenditures in loss-making state-owned enterprises," he said. "There is no quick fix to this. That's the bottom line."
MoWaq
@mowaqsh
@MiftahIsmail
at
@MAP_Pakistan
:
"Our growth model is based on import substitution. Richest ppl get loans to kickstart manufacturing at subsidized rates. This fuels import driven consumption from cars to machinery. It's not a competitive model. We fall in elite capture. 1/n
https://twitter.com/mowaqsh/status/1576905324657004544?s=20&t=d6vjRJYgQz8UUgURupmObg
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MoWaq
@mowaqsh
"When we slowdown the economy, the middle class & poor segments get hit the most. The protection amount is almost equal to value addition. No reason to become efficient.
We need to think abt exports, education & building the #Pakistan brand."
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MoWaq
@mowaqsh
"We need to introspect what is wrong with us as an individual. Do the religious minorities feel safe in Pakistan or are ready to move to Canada on the first opportunity.We need to do 4 things
1) Focus on exports
2) Improve agri sector. We import $2b cotton,$1b pulses. Our agri..
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MoWaq
@mowaqsh
productivity is lower than the world in everything yet we call ourselves agri country.
3) We need to live within our means.
4) Educate our children. Most important job is parenting. 2 schools Aitchison & KGS account for all Ministers etc. There's no social mobility in Pak.
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MoWaq
@mowaqsh
"1/3 of #Pakistan is under water. Many have lost everything they had. Yet the nation moves on. We are resilient. But I don't want us to just be resilient. I want Pakistan to be richer, not be hungry & more educated."
https://twitter.com/mowaqsh/status/1576905346236678145?s=20&t=d6vjRJYgQz8UUgURupmObg