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Will we be the 16th largest economy in 2050? by Khurram Husain

Will we be the 16th largest economy in 2050?

By

Khurram Husain |

2/16/2017 

A REPORT by PwC has everyone talking due to a claim reportedly made in it that Pakistan will be the world`s 16th largest economy by the year 2050.

The finance minister has gone the extra mile by publicly congratulating the country on the `economic turnaround` affected by his government, citing the PwC report and an opinion piece in Bloomberg by George Mason University`s Professor Tyler Cowen, in which he says that `most of Pakistan`s developments are fairly positive`.

Unfortunately, the finance minister, in his enthusiasm, claimed that Bloomberg has also declared Pakistan as the most underrated economy in the world in its recent report titled Pakistan`s Economy Is a Pleasant Surprise. In f act, the piece in question is not a `report` but an opinion column, and below it, the following disclaimer is clearly featured: `This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

In any case, let`s take the example of the PwC report since it is weightier and the claim being made sounds far more spectacular. The first thing to note is this: the PwC report does not say anywhere that Pakistan is going to be the 16th largest economy in the world by 2050. What it says is that Pakistan has the potential to be the 16th largest economy in the world by 2050. There is an important difference between both claims, and it should be borne in mind before popping any corks.

So the first obvious question to ask is this: what needs to be done in order to unlock this potential? The PwC report does not dwell on Pakistan in any detail. It features extended analyses on Poland, India, China, and Brazil, as well as boxed analyses on Turkey, Nigeria, and Columbia. It pinpoints Vietnam, India and Bangladesh `to be three of the world`s fastest-growing economies` till 2050, and says `Mexico could be larger than the UK and Germany by 2050`. Pakistan only features on a couple of lists presented in the report, showing it as having the potential to become a large economy by 2050 in purchasing power parity terms.

`To realize this growth potential,` the report says at the outset, `emerging market governments need to implement structural reforms to improve macroeconomic stability, diversify their economies away from undue reliance on natural resources (where this is currently the case), and develop effective political and legal institutions`.

Next question to ask is: how do they make their projections? What methodology do they use? The report projects future GDP growth rates based on four variables demographics, or the growth of a working-age population; growth in quality of the workforce, measured through average education levels in the workforce; growth in physical capital stock, measured as new investment minus depreciation of existing stock; and technological progress.

As any of these indicators improve, the projection for that country`s future GDP growth rate goes up. On top of that, they make an assumption about real market exchange rates relative to purchasing power parity rates. So if a country is a food importer, and its exchange rate depreciates significantly over time, that would make its food more expensive, thereby lowering its GDP in purchasing power parity terms.

A significant share of the boost that Pakistan gets in this projection comes from the large growth of its working-age population till 2050, compared to the ageing populations of the advanced industrial West or the advanced countries of the Far East (Japan and Korea for example and China`s workforce will be weighed down in the decades to come due to its one-child policy).

Second, Pakistan is food self-sufficient, which means food prices are relatively immune from international shocks, and below what they are in many other countries at the same level of development. This gives a boost to our GDP in purchasing power parity terms.

And that`s pretty much all folks. This methodology says we should grow rather spectacularly in the decades to come because the sheer number of able-bodied people available to work will increase and we can grow enough food to feed them all while keeping food prices under check. In fact, as per the data in the report, Pakistan has the second largest growth in the number of average working age population till 2050,afterEgypt.

The long story here is that the projections made in the report come with a heavy caveat. In order to unlock this potential, we will need further reforms in our political and institutional systems of rule, as well as diversification of our manufacturing base, increase productivity, and fix our balance of payments to underpin macroeconomic stability.

The short story is that, in our case, the methodology used to make the projections has given us a boost largely on the basis of a growing population.

If we can continue investing in our capital stock at present levels, and educate and feed each of these working-age members of the population at cheap rates, then our economy will have this potential.

The report is not meant to spark national celebrations. It is not even meant as a guide for policymakers. It is mainly aimed at large corporations and is trying to tell their leadership that, over the long run, the trade winds are blowing eastward.

Therefore, in order to position their enterprises to capture the dividends that this large, irreversible shift of economic dynamism towards the east is going to bring, they need to start entering markets like China and India n and solidify their presence in these economies. And in doing so, it uses a very broad brushstroke methodology to highlight the underlying sources of strength in the new centers of dynamism.

Pakistan found itself on the list largely by accident, by virtue of its young population and food self-sufficiency. Perhaps we`ll tap this potential, but let`s not pop any corks just yet.•

The writer is a member of staff.

khurram.husain@gmail.com Twitter: @khurramhusain

Editor’s Note: Even today, Pakistan’s underground tax evaders run economy is bigger than the prevailing economy.

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India afraid of Pakistan’s economic stability: Swedish Think Tank

India afraid of Pakistan's economic stability: Swedish thinktank

Swedish think-tank has pointed out that India is afraid of Pakistan’s economic stability through China-Pakistan Economic Corridor (CPEC).

According to the report titled “Silk Road Economic Belt considering security implications and the EU-China cooperation prospects”, India does not want China to perform as a mediator in the disputes, a private news channel reported.

“There is considerable concern within India that China, which has been neutral on Kashmir since 1963, can no longer be so now that its economic and security interests in these territories are growing in stake,” says a report by the Stockholm International Peace Research Institute (Sipri) – a Sweden-based think tank.

It further stated that China’s involvement after implementation of CPEC would possibly make it a stakeholder in Kashmir dispute as India does not want to internationalize this matter.

The report stated that India is depressed over the chances of employment in Pakistan after CPEC project.

Reference

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PAKISTAN THE DEPENDENT STATE – PART 1 Samson Simon Sharaf in The Nation

PAKISTAN THE DEPENDENT STATE  –  PART 1

 

 

Samson Simon Sharaf

2016 was a year of mixed achievements. Though theoretically, Pakistan is an independent sovereign democratic state, practically it is tied everywhere with chains. The governance structure of the state is ineffective and manipulated whimsically. The degeneration from a developing to an underdeveloped country is proceeding at a very fast pace. This decline is not attributable to any inherent defects of national power and political economy. It is manmade and artificially articulated to neutralize the many inherent capabilities of Pakistan. This neutralization is based on a premise of a weak and pliant country. Pakistan’s inherent capabilities are deliberately kept underdeveloped. Those that exist are being undermined or maligned in a manner that they do not matter. Pakistan is being strangulated by an apparently benign octopus with nonkinetic ferocity. This is what I called Pakistan’s Present and Future War way back in 2007. This hypothesis was framed by me in 2002 and has not changed since. The war has now entered its most destructive phase.

This series is an expose of how deliberate Pakistan’s meltdown is. In typical Kautilya Strategy, the enemies have reached into the womb and consuming from within. The analysis leads to the conclusion that Pakistan is already a dependent state in most elements of the policy. Economy, the engine that drives a state is now the biggest security threat followed by terrorism and non-performing democracy. Direct threat from India is way down the ladder.

The economic performance was explained ‘between the lines’ report of the State Bank of Pakistan. Tailored to look least critical and circumvent criticism from IMF, World Bank, and analysts, the central bank pointed to some fundamental structural defects beginning FY2016-17. Though such projections may fool the public and parliamentarians, experts have identified the holes in the argument.

 

 

Image Courtesy: Reference

 

Background

The Government is continuously borrowing money from internal and external sources. Therefore, external debt and liabilities (EDL) rose 7.5 per cent to $60.116 billion in 2010-11 as against $55.901 billion in 2009-10, depicting an increase of $4.2 billion, the State Bank of Pakistan (SBP) indicated in its report.
Public debt also increased to $56.315 billion rose from $52.107 billion. The external debt has risen $711 million in the last quarter of 2010-11. The scheduled bank borrowings increase by 23.8 per cent to $239 million, which were $193 billion in June 2010. In the total EDL, the loan from the IMF grew to $8.94 billion from the same period of last years $8.07 billion.

 

After the end of IMF programme Pakistan’s economic managers have suddenly started reflecting unusual economic indices. This trend points towards a freewheeling policy with no checks from regulators and parliament. Trying to make sense of this berserk behaviour, it begins to dawn why the government wants to put all autonomous regulatory mechanisms under the ministries and why it is legislating new economic laws. The suspicion is that many things akin to PROTECTION OF ECONOMIC REFORMS ACT 1992 are in offing. To know how this Act facilitated money laundering and offshore businesses, read Panama the Marshy Trails (Nation on 12 November 2016). The nightmare has just begun to unravel.

For instance, the report mentions an inflow of US$ 1.1 billion in FDI inflows from China. This lends credence to official claims that forex reserves are rising, growth increasing and fiscal deficits decreasing.  The government is making the nation believe that the economy is resurging, circular debts being contained and energy gap being reduced. We are being made to believe that the new round of investments from CPEC will change the fundamentals of Pakistan’s economy to an export powerhouse in the region. But this is far from true. This single indicator below exposes the hollowness of sustainable economic growth.

US$700 million from $1.1 billion inflow from China is a commercial loan from a Chinese Bank at unknown interest rates to cater for the purchase of Chinese plant equipment. It is a commercial borrowing hidden in the head of FDI. Pakistan at some stage will have to repay this and many other loans like this. One explanation given by critics for such fudging is the drying up of coalition support fund, a reimbursement arrangement shown as remittances in the past. Pakistan’s exports and inward remittances have shown a decrease and not made up for the CSF loss. The international relief in oil prices has been squandered and not translated into improved indices like value addition and exports.  So to build an illusion of growth, the government has plugged the hole with CPEC. This means that rather than making CPEC a viable engine to development, the government is hell bent on mortgaging Pakistan’s future at least to win next elections.

What havoc will such transactions play with structural balances of Pakistan’s economy be anybody’s guess?  Already the IMF has warned Pakistan that if the government does not put in place a comprehensive strategy for reforms, investment, exports and growth such arrangement will create exorbitant debt liabilities. Unlike the five years plans of the past, no comprehensive plan exists. Economic management is on day to day basis through tight controls by the ministry of finance. Economic development models never work like this. This is exactly what happened to Latin American countries during the Cold War and is happening to Africa now. It is also happening in Libya, Iraq, and Syria.

Subtracting the incidental growth created by inflation and consumption, Pakistan’s actual growth is negative. FBR collection has shrunk. In fact, it cannot even cater to debt liabilities. The agriculture sector, the quickest element of national growth is in negative and neglected. This has impacted exports that are mostly agricultural including value added products (textiles etc). These are also hit by the energy shortages. Large scale manufacturing (LSM) is stagnant. Not a single economic index indicates any effort at sustainability. So it is easy for the government to indulge in tied aid, promote consumerism built on imports (tied trade) accumulate bilateral and multilateral loans, borrow commercially from international and national banks, floats bonds and use up all to pay back liabilities (debt trap), plug deficits and support expenses. The cycle goes on and on.

The government borrowed Rs 1079 billion (a turnaround of Rs 1314 billion including paying Rs. 235 billion) from the State Bank of Pakistan during the past six months. This is being dome to cater for budgetary deficits. Once the FDI loans, direct and indirect international and domestic borrowing is combined, it leads to the irresistible conclusion that Pakistan is being led into the  Black Hole of a debt trap that will gradually become impossible to navigate. The government is adding public debt at a rate of Rs 288 billion per month (liability of every Pakistani increasing by Rs. 14,400 per month). Thus the total liabilities of every Pakistani as part of per capita segment of the total loans are not in hundreds of thousand per head but in millions.

Pakistan’s LSM that contributes to home led sustainability has collapsed. From November 2015 to March 2016 LSM recorded a rising trend at 7.6%. By June 2016 it nosedived to zero. The past figures were fudged to please IMF. The ugly conclusion is that LSM is just the tip of a stagnating economy.

These are few but tangible indices indicators. Conspicuously missing is the reflection of the hyped fanfare of CPEC. Military’s efforts in constructing communication highways of CPEC and making Balochistan peaceful are in full gear. But where is the five, ten or twenty-year development plan that shall see Pakistan grow as a self-reliant, export-oriented powerhouse of the region? As of now India is ranked 39th, Sri Lanka 79th and Pakistan a low 122.

This single dissection reasserts my oft-repeated assessment that Pakistan is fast moving towards economic insolvency. The situation is beyond a dependency. Pakistan is moving very fast towards a ‘heavy in debt’; discredited; pliant and non-nuclear state. Got it!

Pakistanis have the right to be dreamers. But dreams cannot be substituted with delusions.

Samson Simon Sharaf

Pakistan Has Mortgaged Airports, Motorways & Buildings to Getting Loans…………….Shame on Country’s Financial Managers

We just hope that our government(s), whether federal or provincial, find other means to improve the economy instead of issuing superficial claims based on such huge amounts of loans

With loans crossing reaching the $75 billion mark, we seriously need to put a stop to this before loans become unpayable and the country defaults.

Pakistan Has Mortgaged These Airports, Motorways & Buildings in order to Get Loans

1) Jinnah International Airport Karachi

2) National Motorways and Highways

3)  Pakistan Television Assets

4)  Radio Pakistan Assets

And more vital assets may be under consideration for a mortgage.

 

Reference: AADIL SHADMAN

For decades, Pakistani governments have been taking loans to fulfill local demands and start new projects. As things stand, Pakistan’s foreign debts have currently crossed the $75 billion mark.

Read More: Pakistan’s External Debt Will Soon Cross a Staggering $75 Billion

In recent times, the loan amounts have reached such highs that not even international or local lending institutions are willing to loan money under simple conditions since they want assurances that their investments won’t go in vain.

For that reason, Pakistani governments have started putting national assets of extremely high value as guarantees (mortgage) in exchange for more loans or otherwise for Sukuk Bonds.

What are Sukuk Bonds?

Sukuk bonds are Islamic bonds. They have structured in such a way that investors get returns without infringing any Islamic law (for example, no interest is charged on such investments). Sukuk represents undivided shares in the ownership of tangible assets relating to special investment activity. In other words, the bond issuing authority purchases an asset and the investors get partial ownership and returns.

The issuer also has to buy the bond back at par value at a later date.

We’ve compiled a list of national assets and the details regarding their mortgage based on official as well as leaked documents in the public domain. The sources have been included in the end.

Let’s take a look at them one by one.

Jinnah International Airport Karachi Mortgaged

Back in 2013, the government used Jinnah International Airport Karachi as security for the Sukuk bonds and raised Rs. 182 billion based on it. The profits for bonds were to be paid using the income from the airport.

The Karachi airport hasn’t been mortgaged just once. Here are all the instances where it has been used as collateral:

  • 2013 was the first year where the airport was put as collateral to borrow Rs. 182 billion.
  • In December 2015, Rs. 117 billion were borrowed against the Karachi airport.
  • In February 2016, Rs. 116.2 billion were raised by putting the airport on a mortgage.
  • A month later, in March 2016, the government used the airport as the underlying asset to borrow another Rs. 80.4 billion.

These amounts were received from local and international institutions and investors.

National Motorways and Highways Mortgaged

Recently, Pakistan government was ready to put up Sukuk bonds in order to raise $500 million from investors but it was oversubscribed at $2.4 billion.

Finally, the government decided to raise $1 billion from foreign investors by mortgaging the Islamabad-Chakwal section of the Islamabad-Lahore (M2) motorway. These bonds are set to mature within 5 years.

Back in 2014, the government pledged the Hafizabad-Lahore section of the M2 motorway to raise another $1 billion in terms of Sukuk Bonds with a 5-year maturity period.

In June 2014, the government borrowed Rs. 49.5 billion by mortgaging the Faisalabad-Pindi Bhatian Motorway (M3).

According to official reports from the Finance Minister and leaked documents from journalist Rauf Klasra the following motorways are already pledged to get loans:

  • Peshawar-Faisalabad motorway
  • Faisalabad-Pindi Bhattian motorway
  • Islamabad-Peshawar motorway
  • Islamabad-Lahore motorway

The news about the above mentioned M2 motorway was also leaked by Rauf Klasra before an official announcement.

Back in 2006, the government decided to pledge most of the national highways and some motorways in order to raise Rs. 6 billion. Islamabad-Peshawar Motorway (M-I), Faisalabad-Multan Motorway (M-4), Islamabad-Murree-Muzaffarabad Dual Carriageway (IMDC), Jacobabad Bypass, D.G.Khan-Rajanpur Highway, Okara Bypass and several other toll-yielding projects were set as security. A consortium of banks provided the loan for seven years.

With this, the trustees own the motorway, all constructions on it, flyovers and interchanges in the case of late payment.

PTV Mortgaged

According to leaked documents, Pakistan government has decided to mortgage all PTV assets in the whole country as collateral for more loans.

The PTV assets are estimated to be worth in billions of rupees at the very least and the national television also holds great importance as far as national security is concerned.

So far there has been no confirmation or denial from the government but considering that these are official documents, the leaks seem authentic. There have been no estimates of how much the government valued these assets for.

Radio Pakistan Assets Mortgage

Similar to the PTV mortgage, leaked documents state that all of Radio Pakistan’s assets in the country will be pledged to get loans.

More details have revealed that 61 Radio Pakistan buildings across the country have been valued at just Rs. 72 crore. Experts say that this amount is equivalent to the value of Radio Pakistan’s single building in Islamabad’s Red Zone let alone 61 buildings in premium areas across the country. Estimates price these assets at several times the valued amount.

By devaluing such a huge asset, it is the investors who are benefiting the most.

Another aspect questioned by the experts is that national radio holds the most importance in times of war and with matters heating up between India and Pakistan, we could lose an important national security asset if the government fails to return the loan on time.

Possible Consequences

Pakistan government has been taking these loans to fill exports gaps, increase foreign exchange reserves, meet budget requirements but more importantly to pay back previous loans.

Ishaq Dar is leading Pakistan to a debt-trap: Experts

When a government pays back loans by taking, even more, loans, it is usually a recipe for disaster. When commenting on this borrowing spree, local and foreign experts say that Pakistani Finance Minister is leading the country towards a “debt trap”. This is a term experts use to explain such disastrous scenarios.

Pakistan can lose these assets if it fails to pay back in time due to unforeseen circumstances

Moving on, this also means that Pakistan cannot pay back its loans at the moment mostly because of the lack of exports and tax collection. When the country cannot pay back loans, putting up national security assets as collateral for the mortgage makes little sense.

Just imagine if Pakistan is late on any of the payments, and/or the situation with India worsens and results in a war, this could lead to Pakistan losing these assets to private institutions.

Issuing bonds is a good way to borrow money. However, mortgaging most of your vital installations like the biggest airport in the country, the national radio or TV or the central roads as collateral seems like a risky proposition, to say the least. What if some issues occur and profits from these institutions cannot be used to pay back profits on the loans? The government would be in deep trouble if something like this happens.

Terrorist attacks or a war could put all profit returns burden on the government

Some analysts also question the use of Islamic Sukuk bonds for budget financing and then linking the returns with treasury bills, citing that it is forbidden and against Shariah laws. However, that is an altogether different debate for another time.

We just hope that our government(s), whether federal or provincial, find other means to improve the economy instead of issuing superficial claims based on such huge amounts of loans. With loans crossing reaching the $75 billion mark, we seriously need to put a stop to this before loans become unpayable and the country defaults.

Citations and Sources: Tribune 1Tribune 2Tribune 3DawnNation92 HD News

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Pakistan’s external debt likely to swell to $110b in four years By Shahbaz Rana

 

Image result for Pakistan's Debt Bomb

Pakistan’s external debt likely to swell to $110b in four years

By Shahbaz Rana

Published: November 13, 2016
 
ISLAMABAD: Pakistan’s external debt is projected to grow to a whopping $110 billion within four years and it will need over $22 billion a year just to meet external payment requirements, posing a serious threat to the country’s solvency.

By that time, Pakistan will again be back to the International Monetary Fund (IMF) to avoid default on international payments as it did in 2013, according to independent projections revealed at the National Debt Conference on Saturday.

Circular debt in power sector: Govt could not repay bank loans of Rs136.5b

Two renowned economists, former finance minister Dr Hafiz Pasha and former director general debt Dr Ashfaque Hasan Khan, have made the external debt projections. The $110-billion external debt level by 2019-20 will be $24 billion higher than projections made by the IMF in its latest report on Pakistan.

Khan shared his assessment at the debt conference, arranged by the Policy Research Institute of Market Economy (PRIME) – an independent think tank.

The duo updated their previous external debt forecast for fiscal year 2018-19 from $90 billion to $98 billion after the government borrowed heavily in the past one year.

At present, the external debt stands at $73 billion, which has been projected to swell 50% to $110 billion in just four years.

They did not see a major change in Pakistan’s export situation and anticipated that by 2019-20, the exports would stand roughly at $25 billion, a level that the country crossed in the last year of previous government of Pakistan Peoples Party (PPP).

Owing to slowdown in exports, Pakistan’s external debt to export ratio has been projected at 441.8% by 2019-20, which is highly unsustainable. By that year, the country will consume 40% of its export earnings to service the external debt.

“Pakistan is fast slipping into the debt trap and neither the government nor parliament is playing its due role,” remarked Asad Umar, MNA of Pakistan Tehreek-e-Insaf while speaking at the conference.

Khan said by 2019-20 amortisation payments would increase to $10 billion. To fill the current account gap, the country will require another $12.5 billion a year, increasing the total external payment requirement to $22.5 billion. The current account deficit will mainly widen due to imports of machinery and plants for projects being developed under the China-Pakistan Economic Corridor (CPEC).

Against IMF’s projection of $16.7 billion, Khan said total external financing needs to bridge the current account deficit and repay loans would stand at $22.5 billion by 2019-20.

After exhausting all available resources including CPEC financing, foreign investment and funds from traditional donors, there would still be $11-billion financing gap, which the country would not be able to bridge without IMF’s help, said Khan.

He predicted that Pakistan would return to the IMF in 2018-19 – the fiscal year when the country’s external debt would be $98 billion and its financing gap will be $9 billion.

“Pakistan’s debt situation is deteriorating rapidly and posing a serious threat to its solvency,” he cautioned. Commercial borrowings comprised 25% of external debt, which was a matter of concern, said Shahid Kardar, former governor of the State Bank of Pakistan.

He said low returns on the country’s foreign currency reserves compared to the borrowing cost were also a matter of concern.

Khan said the PML-N and PPP governments had added $49 billion to the current external debt of $73 billion. Most of this amount, estimated at $32.6 billion, was added from 2008 to 2016 while the remaining $17.4 billion was added during the 1990s.

Pakistan’s trade deficit widens 22%, stands at $9.3 billion

“We need to develop a more effective borrowing strategy, which should be consistent with the country’s development priorities,” suggested Khan.

“Pakistan can keep its debt at sustainable levels by achieving about 6% annual economic growth,” said Dr Ali Kemal, research economist at the Pakistan Institute of Development Economics (PIDE). He, however, said despite the increase in debt levels, Pakistan was still not Greece.

“We are at a comfortable stage and there is no need to worry about anything,” said Zafar Masud, Director General of the Central Directorate of National Savings, while speaking at the conference.

Published in The Express Tribune, November 13th, 2016.

 

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Dr Ashfaque, Dr Pasha, Dr Salman write open letter to IMF “Wrong sides of the Picture”

Dr. Ashfaque H. Khan, Dr. Hafiz A. Pasha and Dr. Salman Shah, who have served on key posts in Finance Ministry and Planning Division have written an open letter to the IMF, exposing wrong picture presented by the Dar-led economic team about Pakistan’s economy. Dr Khan send this article to the Editor of Corporate Ambassador, Javed Mahmood today.

corporateambassador-master-logo1 

The three year program under the IMF’s Extended Fund Facility (EFF), has now come to an end. Pakistan has received $6.1 billion loan from the IMF under this program. During the tenure of the program, Pakistan was required to undertake wide – ranging structural reforms and implement the type of macroeconomic policy that would restore macroeconomic stability, gradually promote economic growth and build foreign exchange reserves to bolster external buffers.

After the completion of the twelfth and the final Review, the IMF Staff Mission Report has declared ‘victory’ and stated that “the Fund Supported Program has helped the country restore macroeconomic stability, reduce vulnerabilities and make progress in tackling key structural challenges. Economic growth has gradually increased and inflation has declined. External buffers have been bolstered, financial sector resilience has been reinforced, and the fiscal deficit has been reduced while social safety nets have been strengthened”.

On the reform side, the Report stated that “tax policy and administration reforms allowed for further revenue mobilization.Steps have been taken to strengthen the State Bank of Pakistan’s autonomy. Energy sector reform allowed a reduction of power outages, energy subsidies, and accumulation of power sector arrears. A country – wide strategy to improve the business climate was adopted”.

The Staff Report contains the views of the IMF on the “success” of the program. We, the three independent economists, through this open letter would like to present the other side of the picture. In particular, we identify the extent of the success, how these “successes” have been achieved and express our disappointment with the failure to implement reforms that are critical for achieving higher economic growth. Needless to mention, the three authors of this open letter have all dealt in the past with the IMF in senior management capacity at the ministry of finance, either as Federal Ministers or Advisor.

Firstly, building foreign exchange reserves to bolster the external buffer was the main pillar of the hurriedly put together IMF Program. The idea was to build reserves and repay the then IMF loan on time. That is why many independent economists including the ones who remained associated with the IMF for a long time termed the program as ‘Self-Serving Program’.

Such an objective of the program forced the government to borrow extensively to build foreign exchange reserves and in the process accumulate net external debt of over $12 billion during the program period. Incidentally, Pakistan added exactly the same amount to its foreign exchange reserves, that is, from $6 billion in end-June 2013 to $18.0 billion in end-June 2016. The above facts clearly suggest that we improved the external buffer entirely through adding external debt. Isn’t it simply postponing the current problem of insolvency to a future date?

Secondly, in a three year program, the IMF has extended sixteen waivers. Perhaps never in the history of the IMF did Pakistan receive such a large number of waivers. This diluted the purpose of the program and also reflected on the lack of emphasis towards implementing and achieving the stated goals of the program.

Sadly, the IMF Staff Mission has selectively highlighted the improvement in some economic indicators from 2012-13 to 2015-16. This includes rising economic growth, falling rate of inflation, rising tax-to-GDP ratio,  higher spending under BISP and private sector credit and falling subsidies as percentage of GDP.

The rate of economic growth achieved in the last three years remains contentious. The Pakistan Bureau of Statistics (PBS) has estimated the GDP growth rate as 4 percent or above each year, reaching 4.7 percent in 2015-16. The authors have presented contrary evidence that the growth rate has been exaggerated each year, and it has ranged between 3.1 to 3.7 percent during the program periods. The Data Quality Assessment Framework (DQAF) of the IMF should have been used to check the reliability of the national income estimates.

We would like to quote the recent statement of the Managing Director of the IMF as posted on September 1, 2016 by iMF direct. In her words “The longer demand weakness lasts, the more it threatens to harm long-term growth as firms reduce production capacity and unemployed workers are leaving the labor force and critical skills are eroding. Weak demand also depresses trade, which adds to disappointing productivity growth”.

This statement clearly depicts the current state of economic growth and unemployment in Pakistan in terms of the social costs of the excessive focus on stabilization policy. The persistence of lower economic growth has failed to create enough jobs. People in general and youth in particular, are finding difficulties to get jobs. People remaining unemployed for a longer duration are becoming unemployable, with all its social and economic consequences. Not only that the unemployment rate has surged to a 13 years high at over 8.0 percent (including the ‘discouraged worker’ effect), youth unemployment rate has also increased to over 11 percent in 2014-15. Furthermore, between 2012-13 and 2014-15, the annual number of entrants into the labour force has been approximately 650,000 as against 1.3 million during 2008-13.

A particularly worrying feature of the current employment situation is the extremely high unemployment rate of 20 percent of workers with either graduate or post graduate degrees. There are 2.4 million educated workers with bad employment prospects. This is the unfortunate outcomeof the IMF Program

On the size of the fiscal deficit, the IMF Report claims that this has been reduced from 8.5 percent to 4.6 percent of the GDP. A number of steps have been taken to report smaller deficits. For example, holding back refunds and forcing  commercial entities to pay taxes in advance to jack up revenue, privatization proceeds and foreign grants treated as non-tax revenue to inflate overall revenue rather than treating them as financing items, engaging in quasi-fiscal operations outside the budget, allowing for large statistical discrepancy each year (cumulatively Rs. 600 billion in three years) to show lower expenditures, exaggerating the size of the Provincial cash surplus, retaining earmarked revenues in the Federal consolidated Fund and building up large contingent liabilities (over Rs. 1400 billion of power sector circular debt, accumulation of debt in commodity financing and pending tax refunds). The IMF staff has either been blissfully unaware of or has condoned this creative accounting. Adjusting for these practices implies a fiscal deficit each year in the range of 7.0 to 8.0 percent of the GDP.

Other areas, where serious distortions exist, are: the estimates of the GDP deflator; investment and saving rates and rate of inflation, especially for poor households. A case ought to have been made for complete operational autonomy of the PBS.

Yet another “success” of the program as stated by the IMF Staff Mission is the sharp reduction in inflation rate. It has declined from 7.4 percent in 2012-13 to 2.9 percent in 2015-16. Does this decline owe to the ‘prudent’ fiscal and monetary policy pursued during the program period? The answer appears to be in the negative. The international oil and commodity prices started collapsing since June 2014. Such a collapse in the oil and commodities prices led to a worldwide decline in inflation, including in Pakistan. Furthermore, as stated above, the pursuance of stabilization policy for a prolonged period weakened the domestic demand, resulting into deceleration of prices. Thus, the sharp decline in inflation during the program period owes to the weakening of domestic demand, as well as a collapse in the international prices of oil and commodities and not to the prudent use of monetary and fiscal policy. In fact, when inflation rate was rapidly on the decline, the SBP was pursing an easy monetary policy.

The quarterly reviews have ignored the deterioration in key economic indicators. They failed to discuss big decline in exports – to – GDP ratio, stagnation in the overall and private investment – to – GDP ratio, fall in FDI, rise in external debt and public debt – to – GDP ratios, fall in total PRSP pro-poor expenditure to GDP and very importantly, a rise in the rate of unemployment especially among young, educated, and female workforce. Only 750,000 jobs were created annually in 2013-14 and 2014-15 as against 1.1 million jobs annually earlier.

As stated above, Pakistan was asked to implement a wide-ranging reforms under the IMF Program. What has been the performance on the reform side?

Power Sector Reforms

The glaring failure of the Fund program is in the implementation of power sector reforms. The 12thReview Report declares victory primarily by demonstrating that the subsidy to the sector has fallen massively from 2percent of the GDP in 2012-13 to only 0.6percent of the GDP in 2015-16.

How has this been achieved? The answer is not by any major improvements in efficiency through big reduction in losses. Instead, the policy has been to raise the power tariffs to generate more revenues and thereby reduce the need for subsidies. From 2012-13 to 2015-16, the average electricity tariff (including surcharges) has been enhanced by 40percent, leading to extra revenues of distribution companies of over Rs 250 billion. The tariffs have been increased at the time when the fuel costs have fallen by over 49 percent.

On top of this, contingent liabilities have increased exponentially in the sector. Today, the circular debt of the sector stands at almost Rs 630 billion, over 2percent of the GDP. Sooner or later, this debt will have to be retired, as happened in 2012-13, if a breakdown is to be avoided in supplies due to liquidity problems in the sector.

IMF also claims on behalf of the Government, that power load-shedding has been substantially reduced, especially in industry. Evidence to the contrary is the large continuing demand-supply gap according to NEPRA, and the fact that electricity consumption per industrial consumer has fallen in nine out of ten distribution companies, in comparison to the level achieved in the pre-load-shedding years.

Tax Reforms

The IMF Twelfth Review has highlighted, as one of the key successes of the Program, the over two percent points increase in the tax-to-GDP ratio. Much of the improvement has come in 2015-16. How has this been achieved? The main contribution is actually from enhancement in effective tax rates and not by broadening of the various tax bases. The tax structure has become more regressive and created more distortions in economic activity. Furthermore, various levies which used to be the part of non-tax revenues prior to the IMF Program were renamed as ‘other taxes’ and added to the tax revenue collected by the FBR to arrive at ‘new’ tax – to – GDP ratio. Such a practice has made the ‘new tax – to – GDP ratio non-comparable with the pre-IMF Program period.

The biggest failure is in lack of development of the direct tax system. The elite continues to enjoy wide ranging tax exemptions and concessions like the virtually no or low taxation of global income, profits of private companies, agricultural income and unearned capital incomes. The IMF clearly prefers not to antagonize the ruling elite through its reform agenda.

Improvement in Living Standards

Contrary to the claims by the IMF, living standards have probably fallen in Pakistan during the tenure of the Program. A number of reforms undertaken have contributed to rising unemployment and poverty.

The anti-poor actions include, firstly, the rise in input costs of fertilizer and electricity in agriculture due to hike in power and gas tariffs and additional taxation in the form of the GIDC. The result is that food prices have risen faster than the overall CPI and wages of unskilled workers. Today, Pakistan has the extremely serious problem of malnutrition. In the 2016 ranking of the Global Hunger Index, Pakistan has the 11th lowest position, even below Bangladesh, out of 118 countries. The non-implementation of the PMs agricultural package of September 2015 under the IMF pressure has contributed to the recent debacle in the sector.

Secondly, the primary adjustment mechanism for achieving the fiscal deficit targets in the Program has been large cut backs of up to 30percent in budgeted development spending by the Federal and Provincial governments. In 2015-16 alone these cuts have implied less employment generation of almost 300,000 jobs.Thirdly, hikes in indirect taxes have affected the cost of living adversely. This includes the levy of minimum import tariffs on basic food and other items and jump in GST rates on petroleum products, especially HSD oil.Fourthly, the decline in exports has contributed to loss of employment in labor-intensive sectors like SMEs and textiles. Consequently, as highlighted earlier, the underlying unemployment rate has gone beyond 8 percent. Fifthly, social indicators have shown only minor improvement in three years. This is due particularly to the pressure on Provincial governments to spend less on social and other sectors so as to generate large cash surpluses.

Anti-Export Bias

According to the original Program projections, exports were expected to show a steady annual growth rate of 8 percent and reach $30 billion by 2015-16. Instead, they have been falling since 2012-13 to below $22 billion last year, a short fall of over 23percent. This is perhaps one of the single most important failures of the Program. It has adversely impacted on growth and employment in the country and frustrated the achievement of greater self-reliance.

How did the Program reinforce the anti-export bias? The record level of external borrowings during the last three years has led to a form of ‘Dutch Disease’. Larger reserves, based completely on external borrowing, have created artificial stability in the value of the rupee, thereby reducing competitiveness. Enhancement of electricity tariffs by over 40percent and gas price to industry by 64percent, further affected competitiveness. In an effort to meet the Program revenue targets, FBR has held back over Rs 200 billion of refunds, leading to liquidity problems for exporters. Further, levy of a minimum import duty on raw materials and intermediate goods has added to costs.

Today, the decline in ability to service external debt obligations, including those to the IMF, is clearly demonstrated by the phenomenal increase in the external debt to exports ratio. It was 193percent in 2012-13 and has risen to 266percent by the end of 2015-16. It is likely to continue rising and go beyond 300percent by 2017-18. There is no other option now in the post-Program scenario but to present a strong export incentive package, including significant depreciation of the Rupee.

External Financing Requirement

The original Program projections were that external financing requirements, consisting of external debt amortization and the current account deficit, would reach $9.2 billion by 2016-17 and fall to $8 billion in 2017-18. However, following the much larger build up of external debt, the latest estimates of the financing requirement in the 12th Review is $ 10.9 billion in 2016-17, rising to $13.2 billion in 2017-18.

However, these estimates are based on significant positive growth in remittances and exports and a big jump in FDI. This is highly unlikely given the current trends. A more realistic estimate of external financing requirement is $15 billion in 2016-17 and $18 billion in 2017-18. This is more than 5percent of the GDP, which is considered the danger point. Part of this requirement will have to be met by a sizeable depletion of foreign exchange reserves. There is a high likelihood that by June 2018, reserves may fall to about half of the present level.

Where is the sustainability of our external position? Has the IMF Program reduced our vulnerabilities? Are we doomed to go back once again to the IMF? Will conditionalities next time go beyond the usual prior actions? Already, two weeks after the end of the IMF Program, Pakistan has been forced to float relatively high cost bonds externally of $1 billion. This indicates a lack of confidence in the sustainability of reserves in coming months and years.

Finally, in the immediate aftermath of the IMF Program, the economy has begun to unravel. Agricultural growth was negative last year and the prospects for the current cotton crop are not much better. Growth of the large-scale manufacturing sector has also turned negative in the last four months for which data is available. Seven out of the twelve industrial groups are showing declining output. The fall in exports continues and the trade deficit has risen sharply. Remittances are also contracting, along with a sharp reduction in FDI. FBR tax revenue growth has plummeted and large borrowing has been resorted to by the Federal Government from SBP. Development releases of funds have been relatively small and the process of implementation of CPEC infrastructure projects is very slow. Contingent liabilities have reached alarming levels and the bleeding of public sector enterprises/utilities continues. Can we still say that the reforms implemented during the tenure of the Fund Program have left the economy in a ‘sustainable position’? The answer, unfortunately, is an unambiguous no.

 

* The authors have worked for the Ministry of Finance and dealt with the IMF at the highest level for a long time.

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