Pyrrhic victory of current account deficit 

By: Mohammad Ishaq Dar (Ex-Finance Minister)      Published: 11:12 AM, 18 Sep, 2020
Pyrrhic victory of current account deficit 

In the name of stabilizing the economy, the economic managers of PTI government have, unwittingly and incompetently, grounded the economy in the two-year period. There is a long list of facts that would establish this proposition without any risk of refutation. The trumpet repeatedly blown by Prime Minister Imran Khan and his cabinet members so far is the improvement in current account deficit which needs to be dispassionately analysed, together with the assessment of economic losses incurred so far on this account, in order to understand the reality.

Current Account Deficit (CAD): As per official numbers of State Bank of Pakistan (SBP), the CAD during PML-N’s tenure was $3.13 billion in FY14, $2.81 billion in FY15, $4.96 billion in FY16, $12.27 billion in FY17 and $19.19 billion in FY18. Last two fiscal years (FY) were extraordinary as forex payments were to be made for energy projects to end 18 hours a day loadshedding, CPEC, infrastructure development and security-related heavy payments. CAD was to come down substantially in FY19 and onwards as bulk of extraordinary payments had been completed by FY18. PTI government has brought CAD down to $13.43 billion in FY19 and to $2.97 billion in FY20. But this reduction has not been achieved through increase in exports and instead is a result of mercilessly curtailed imports in the last two years by imposing sky-high customs duty on imports. Surely, the tool used to achieve reduction in CAD has been imprudent as industrial activity suffered massively and halted, resulting in negative-10 percent growth in large-scale manufacturing in FY20 as against over 5 percent positive growth in FY18. This has caused addition of millions in jobless number and severe negative impact on overall economy.

Let’s go through herein below some of the major economic losses which the country has already suffered on account of PTI’s aforesaid policy and other failures: 

Economic Growth: The GDP growth of 5.8 percent achieved by PML-N govt in FY18 has been callously brought down to 1.9 percent in FY19 and to negative 0.4 percent in FY20 due to complete failure of the economic policies. Sadly, Pakistan has seen negative economic growth after 68 years since 1952. These numbers are indicative of how seriously the economy has been damaged. The negative growth rate of 0.4 percent for FY20 is visibly understated as it is based on a negative growth of around 5 percent in large scale manufacturing whereas it has finally closed at negative 10.17 percent. Like the 3.3 percent interim GDP growth for FY19 which turned out to be 1.9 percent, the negative growth rate of 0.4 percent for FY20 also expected to end up around negative 1.5 percent. 

Inflation: With falling output (growth), prices were on the rise. In the last year (FY18) of PML-N government, inflation was around 4 percent which rose sharply to 11 percent in PTI’s FY20. This high level of inflation was not witnessed in last 13 years. Food inflation which was one percent when PTI took office in 2018 and has shot up to 15 percent in urban and 18 percent in rural areas by the close of second year of the incumbent government. Consequently, extremely important kitchen items’ prices have witnessed exceptionally heavy increases such as sugar, wheat, pulses and cooking oil etc. The electricity and gas bills as well as medicines and petroleum products’ prices have also sharply escalated. The negative welfare impact of such increases in prices of utilities and essential commodities of daily use, on the poorest segments of population has become totally unbearable. 

Interest Rate: The SBP policy rate saw a massive increase from about 6.25% (2018) to 13.25% by March 2020. This was also unprecedented during the last decade. It effectively amounted to a huge transfer of wealth from investors to commercial banks, which kept lion’s share to themselves and passed on a small share to the depositors. But more importantly, it signaled that investment and growth were no longer on the horizon. The public debt servicing cost almost doubled due to such irresponsible handling of the policy rate by State Bank of Pakistan. Following Covid-19 pandemic, the unbearable policy rate of 13.25 percent was reluctantly brought down in phases to 7 percent in March 2020 which would help the hapless business and industrial sectors but has naturally resulted in withdrawal from Pakistan of $3.7 billion of hot-money deposits.

Exchange Rate: On the basis of a lame excuse and misplaced perception that the previous government had artificially kept the exchange rate high with the result that imports were too high and exports were suffering, the PTI government heavily depreciated the rupee from Rs.121/$ to Rs.169/$, a whopping 40 percent. This devaluation has caused an addition of over Rs.5,000 billion in the public debt with regard to its external portion. There is hardly any realisation how badly this rupee-depreciation has affected the common man through increase in prices of large spectrum of goods and services including those of food items and utilities, particularly electricity.

Imports & Exports: There has been a major improvement in the trade deficit from $32 billion in the last year of PML-N government to $20 billion in FY20. But most inimically this has happened on account of a major reduction in imports which fell from $56 billion to $42 billion, implying a reduction $14 billion or 25 percent. Such phenomenal decline is the reason for a massive fall in large scale manufacturing (LSM) activity in the country which has resulted in an unprecedented negative growth of 10.17 percent in LSM. Curiously, there has been a decrease of $2.5 billion in exports also, which again implies that economic activity slow-down is all-round.

GDP and Per Capita Income Losses: The GDP in dollars terms had increased by $84 billion from $231 billion to $315 billion during PML-N’s tenure 2013-18 which has declined by $51 billion to $264 in last two years of PTI’s. Likewise, the per capita income which had increased by $318 from $1334 to $1652 has fallen by $297 to $1355 in the same period. This is a very sorry outcome, a clear indicator of incompetence of amateurish economic managers.

Fiscal Deficit: The fiscal deficit was recorded at 6.6% in last year of PML-N government, which was higher compared to where it was brought down during 2013-16 i.e. from 8.2% to 4.6%. The higher deficit in last two years of PML-N government was because of the need for economic expansion warranted by higher foreign investments in CPEC, for elimination of load-shedding from the country for which the government facilitated setting up of three LNG-based power projects with a combined capacity of 3600MW in the public sector (financed through use of its own foreign exchange reserves) and extraordinary security related expenses including financing of domestic wars against terrorism. Yet, without having a comparable development and security related agenda and investments, the PTI government has taken fiscal deficit to unprecedented heights of 8.9 percent of GDP in FY19 and 8.1 percent in FY20;  if under-utilised Covid-19 relief amount of Rs540 billion and unspent federal development budget of Rs234 billion during FY20 are taken into account, then the real fiscal deficit for FY20 is Rs4,150 billion or 9.9 percent as against reported number of Rs3,376 billion or 8.1 percent of GDP.

Public Debt: The policies of high interest rate, imprudent depreciation, profligate spending and stagnant tax collections have all culminated into an unprecedented increase in gross public debt which has ballooned by Rs11.4 trillion from Rs24.9 trillion as on June 30, 2018 to Rs36.3 trillion in PTI’s two years of governance. PML-N government had left the Debt-GDP ratio at 72 percent in 2018, after inheriting it at 64 percent in 2013. Therefore, it added about 8 percentage points to the ratio after a five-year period but also contributed an average of 4.5% annual growth in the economy. On the other hand, in just two years, PTI government has taken Debt-GDP ratio to 87 percent, adding 15 percentage points to public debt, while average annual GDP growth in this period has been only 0.75 percent. Furthermore, despite PM Imran Khan’s public commitment (before election 2018) of reduction in public debt and liabilities by Rs10 trillion, there has already been a huge increase of Rs14.6 trillion in a short span of two years of PTI’s government, taking it from Rs29.9 trillion to Rs44.5 trillion.

IMF program and Reforms: PML-N government when it started its term in June 2013, swiftly concluded and signed an IMF program on 4th July 2013 in order to remove confusion in the markets as prediction of sovereign default within months was globally known keeping in view SBP forex reserves of $6 billion in June 2013 with outstanding amount of $4.6 billion payable to IMF. In 2018 when PTI government took office, the forex reserves with SBP were $10 billion with no possibility of sovereign default of its obligations. Choice with PTI was either to go quickly for an IMF program or go to international bond market to shore up SBP forex reserves as PML-N had raised $2 billion in Euro Bonds in November 2017 at an average price of 6 percent. PTI government remained confused and could neither tap the international bond market nor clinch quickly an IMF program which shook the markets and business confidence and added toll to our economic and ratings indicators. Having concluded finally, after great deal of time waste, a program with IMF, the government has in no time failed to implement the structural reforms and measures agreed in the program due to its weak performance and incompetence. Virtually the IMF program has been almost suspended for many months due to government’s inability to perform due to the economic mess created by it as a result of flawed monetary and fiscal policies.

Maligning of CPEC: Another important source of forex support, arranged by PML-N government in 2013 was from CPEC investments. PTI has regretful history on this important arrangement of national interest. The infamous political 126 days sit-in of 2014 of Imran Khan in Red Zone Islamabad delayed the visit to Pakistan by almost one year of Chinese President, resulting in a corresponding delay in finalisation and signing of CPEC agreement between the two friendly countries. Soon after CPEC projects’ implementation started in 2015, Messrs. Imran Khan and Asad Umer started lies-based public campaign that entire CPEC wasn’t investment but loans to government of Pakistan and that too at an exorbitant cost of 8 percent. In a regular quarterly review, IMF inquired about the veracity of allegations by PTI leaders and the scribe satisfactorily explained the factual position that barring very small amount for public sector projects at an average annual cost of 2 percent, entire remaining amount is investment in private sector projects, mainly energy, in Pakistan. Also, after taking office in 2018, PTI government practically abandoned the CPEC for nearly two years. Unfortunately, CPEC projects were viciously maligned with accusation of corruption in press conferences by PTI’s cabinet ministers. When Asad Umer as Finance Minister, was confronted by IMF, during program negotiations, with his past allegation about CPEC, poor guy had no choice but to confirm the truth about overwhelming majority investment in private sector projects and annual cost of around 2 percent on public sector projects; this was also reported on electronic media from Washington DC. The more one analyses the more one discovers an endless string of follies that the PTI leaders and government committed with CPEC, a project of national Importance. 

Conclusion: The CAD is an area over which PTI government has erected its entire castle of economic achievement in its first two years of governance. PTI has paraded that CAD as percentage of GDP in FY18 was the highest in history which they inherited. It is amazing how brazenly facts are distorted by PTI as there have been periods of much higher CAD in country’s history like in FY08 it was 8 percent of GDP as compared to 6 percent in FY18. Curtailment of CAD through massive reduction in imports, including capital and development related goods, has played havoc with the domestic production, declined economic growth to negative 0.4 percent, sky-rocketed food inflation, escalated unemployment from 5.8 percent to over 10 percent and pushed 15 million more people below poverty line. PTI is touting CAD reduction as its greatest victory. But this is a pyrrhic victory, not worth the huge cost borne by the economy and the people of Pakistan.

(The author, a UK Fellow Chartered Accountant, is former Finance Minister of Pakistan and former Leader of Opposition in the Senate of Pakistan)

Twitter: @MIshaqDar50