Economic crisis and fear of default


Pakistan now faces daunting challenges in coping with the economic crisis to meet its balance of payments needs and avoid economic failure.

The budget deficit for the outgoing year 2021-22 is expected to be around Rs 5.2 trillion. Circular debt in the power sector will amount to Rs 2.5 trillion. The trade deficit has increased by 58% to around $45 billion while the current account deficit is expected to be around $16 billion.

As a result of high imports and exchange rate pressures, foreign exchange reserves have shrunk to $9.7 billion, barely enough to cover 1.5 months of imports.

The Pakistani rupee is continuously falling against the US dollar and has fallen from 180 rupees per dollar to 202 rupees. Consequently, the inflation rate rose to 14% despite an increase in the key interest rate to 13.75%.

Gross government debt increased to 44.365 trillion rupees or 75% of GDP. Therefore, debt service would be around Rs 3,900 billion over the next fiscal year. Total external debt and liabilities increased to $128 billion in March 2022.

The government is in a difficult situation since it will have to pay 21 billion dollars to international creditors for the service of the foreign debt during the next fiscal year.

The country is facing a severe economic crisis in an environment of political turmoil and uncertainty.

If timely policy actions and corrective policy measures are not implemented, the country may face a default and a crisis like Sri Lanka, which will have profound implications for inflation, growth and jobs. and will affect the poor and vulnerable segments of the population.

Pakistan has no choice but to accept the strict IMF conditions in order to reinstate the IMF program to avoid an economic default.

We all know that the country has already undertaken 22 IMF programs in the past and IMF policies and programs have not proven to be a panacea to solve the economic problems of the country.

It should be noted that most of our economic problems span the last 15 years, as the country has maintained a high budget and a high current account.

Unfortunately, these deficits were financed by borrowing abroad, which increased the country’s debt burden.

The nuclear-capable nation now faces a dilemma due to inappropriate macroeconomic expansionary policies, higher government spending, loss of state-owned enterprises, untargeted subsidies, fixed exchange rate policy until in 2017 and an expansionary import-oriented fiscal policy of the outgoing government in 2022. this led to a high current account deficit and put pressure on the exchange rate, resulting in double-digit inflation constantly high.

Although the new government has taken steps to remove subsidies on petroleum products and impose restrictions on imports of non-essential items, the country needs an immediate political consensus on a charter for the economy backed by the government. establishment to avoid an economic collapse. Tough decisions are needed over the next few months to stop the bleeding from overspending and over-importing.

First, Pakistan needs to revive IMF financing by implementing economic reforms to restore credibility in the markets, as well as continued financing of CPEC.

Reforms aimed at reducing high trade and current account deficits would require significant cuts in spending and imports, but without negatively impacting the cost of living of low-income families whose lives have become miserable due to the persistence of a high inflation in recent years.

The government’s economic reform program is to include a halving of the budget and current account deficits over the next year by reducing the budget deficit by 2 trillion rupees and non-essential imports by $10 billion consumed by the elite rich.

The reduction in imports must be achieved within the first three months to avoid an economic collapse and halt the free fall of the Pakistani rupee against the US dollar.

This is essential to tighten the belts of high-income households, to send a signal that the poor are not victims of the economic mismanagement caused by the previous government. The economic reform program should include the following measures:

First, through fiscal and credit policies, we must limit the growth of industries that are heavily dependent on imports (cars, luxury goods, electronics, etc.) producing for the domestic market.

Second, declare all exporting industries as tax-exempt manufacturing units and ensure that they are provided with all utilities at regionally competitive prices and subsidized credits. Bangladesh thus increased its exports to 45 billion dollars.

Third, provide Rs 800 billion in targeted cash grants to 30 million poor and vulnerable families through the BISP registry system to offset rising electricity, oil and food prices.

Once targeted subsidies are in place, market prices for these goods can be raised through higher tax rates and import duties, which would provide revenue to provide targeted subsidies to poor and vulnerable groups.

Fourth, government non-development expenditure should be cut by Rs 1 trillion by reducing waste in civilian and military institutions, reducing development expenditure and reducing projections, except for dams and water management. water, privatizing loss-making state enterprises and reducing untargeted subsidies. .

Fifthly, it is necessary to impose a tax to raise 1 trillion rupees to reduce public debt. This tax can be levied on: (i) all assets (vehicles, agricultural land, urban real estate and PSX shares) of individuals who own assets of more than Rs 5,000,000; and (ii) real estate and equity capital gains, and profits of large corporations. It is a sacrifice that should be made by the wealthy elite to save the country.

Sixth, reduce interest rates on loans and deposits by 5% by reducing the discount rate to 8%. This will reduce the cost of borrowing for businesses and accelerate GDP and employment growth.

Low-income pensioners and widows can benefit from income protection through higher rates on national savings instruments. The aim should be to save about 700 billion rupees a year on interest charges on domestic public debt.

Finally, the country is expected to impose a one-year embargo on all imported cars, cell phones, non-essential food and all manufactured goods for domestic use with the aim of reducing imports by $8-10 billion a year. next year, which would reduce the current account deficit, strengthen the national currency against the US dollar and accelerate growth and job opportunities.

The author holds a PhD in Economics from the University of Sussex, UK, and has over 37 years of experience in senior positions in various national and international institutions.

Published in L’Express Tribune, June 13e2022.

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