April 22, 2019
Is taking bold decisions at crucial times is the hallmark of great leadership? Is the reshuffling of the Federal Cabinet quintessential to bid higher yields or it’s the exogenous factors that lead the King to take such decision? How King’s hand (the Ex-Finance Minister Asad Omar) got entrapped into the reshuffle? Will the reshuffle bring new hope for Naya Pakistan masses which they are actually waiting from the past eight months? Most of the above-stated questions are clustered in human minds and they required to be addressed as the reshuffle of the Federal Cabinet has left most of the people in the state of utter shock and surprise.
Currently, Pakistan is undergoing serve current account deficit recorded to be 19.73 USD Billion in the first quarter of 2019 (Trading Economics), nearly a 59 percent increase from an account deficit of USD 12.4 billion in 2017. Now, the main factors accounting for higher current account deficit is exorbitant imports which also includes major chunk related to the China Pakistan Economic Corridor (CPEC) and in contrast less than forecasted inflows i.e. export revenue and remittances. These two main ingredients account for widening current account deficit and foreign currency reserves levels covering less than two months of import. Moreover, the new government inherited these crises not only from domestic perspective indeed globally 2018 is referred as a poor year for the emerging markets with global monetary tightening, increased oil prices, and reduced investor confidence which have significantly and negatively affected Pakistan’s already precarious economic standing. In addition, deep structural problems and poor macroeconomic policies have also exposed the Pakistan economy towards an array of debt vulnerabilities. In the last few years, Pakistan has consistently suffered from an overvalued exchange rate, low interest rates, and moderate inflation rates. Such loose monetary policies have translated into high domestic demand with two-thirds of Pakistan’s economic growth originating from domestic consumption. Due to an overvalued exchange rate, there is a high level of imports in comparison to exports. Pakistan experienced high fiscal deficit due to the rise in spending during elections. The main issue at hand why Pakistan is suffering from financial crises is its pervasive tax evasion and drastically low level of domestic resource mobilization. The tax revenue collection contributes to less than 10 percent of GDP in comparison to 35 percent of countries that are part of the Organization for Economic Development (OECD). Likewise, Pakistan is also lagging behind the energy sector due to regular and consistent power outages.
The ruling King of Pakistan needs to realize the sensitivity of the matter and play tactfully because both China and the United States are major competitors
I believe the Chinese investment is among the important driver impeding Pakistan into rising debt crises as Pakistan is the key partner in China’s BRI project and also the CPEC. CPEC is a $60 billion program of infrastructure, energy and communication projects that certainly aims at improving the regional connectivity. But, in actual, the CPEC infrastructure costs have laid a greater debt crisis for Pakistan economy. Although, I am still of a belief that Pakistan current economic situation is majorly homegrown which has mushrooming impacts. The root cause of power shortages is precisely no longer the matter of less power generation indeed it is more of fiscal mismanagement of the power sector.
Based on the historical experiences Pakistan government is highly reliant on the US bilateral assistance although it should not be the first choice of the Pakistan government. The only viable option for Pakistan to regain economic stability is an IMF bailout. If we dug deep into infection point then any bailout from a bilateral donor, for instance, the US, China or Pakistan’s Gulf friend’s state will not resolve the issue until unless the loose macroeconomic, fiscal and monetary policies are carefully handled. It is important for the King rather than changing the batting order and kicking off the Capitan of the ship it’s of sheer importance to get the house in order and find a possible remedy for its mounting domestic economic issues. Just for reference 18 out of Pakistan’s 21 IMF programs from the past 60 years have not been completed beside the relaxation of USD 30 billion in terms of financial support across those programs. The current US administration and Congress is not supportive of any further bilateral funding to Pakistan especially that went towards paying off the Chinese loans that imply no more US dollars seeding into Pakistan. Indeed, the IMF package would be more likely to bail out Chinese banks.
The primary chunk of Pakistan’s trade deficit is attributable to China and even if we received the bailout from IMF all will go to payback Chinese loans for which US IMF program will show resistance. Now, in such severe crises, China should help Pakistan and should provide immediate concessions and readjust its trade surplus with Pakistan in different ways. For instance, China should import cement and other purchases from Pakistan although for a short term but to show concern that they are aware of the economic turmoil and there for help in the hour of need. Having a quick glance on other nations struggled with debt obligations to China, Pakistan also needs to rethink on the strategy to be adopted for Chinese rather than just shaking off the cabinet pillar and reshuffling. In July 2017, Sri Lanka signed over a 99-year lease for Hambantota Port to Chinese state-owned enterprise against the inability to pay of BRI debt obligations. Likewise, Malaysia had a different strategy and decided to cancel major infrastructure projects with China keeping in view the inability to pay off the debts.
In order to conclude, the ruling King of Pakistan needs to realize the sensitivity of the matter and play tactfully because both China and the United States are major competitors. If IMF doesn’t provide support for bailout package then it will forego major geopolitical potential in the region and provide the playing field in the hand of Pakistan next target for bailout package i.e. China. As China has also invested heavily in Pakistan and is not in the either economic or defense position to get another back off from Pakistan like Malaysia. Certainly, they need to adjust and show flexibility. Moreover, the US also has stakes attached to Pakistan like China. Pakistan is the most important component of the balance of power in the South Asian region. US needs Pakistan assistance to have negotiation settlement for the conflict in Afghanistan and might offer Pakistan to deliver the Taliban against having IMF. Moreover, another point of lucrative interest for the US is Pakistan largest percentage of youth in the country that acts as an opportunity for the US government and private sector to increase investment in Pakistan. The leader of Naya Pakistan should stay hopefully as the economy despite being in a difficult situation has strong geostrategic importance. Thus, the focus should be more towards crafting the state of the art strategies to gain maximum benefit from both of the major competitors.