Moody’s report

Updated 13 Nov, 2023

EDITORIAL: Moody’s recent reassessment of Pakistan’s vulnerability comes as no surprise: with exports a mere 10.5 percent of Gross Domestic Product (GDP) Pakistan is the most vulnerable South Asian nation to balance of payments crises. Bangladesh performed better than Pakistan with exports accounting for 12.9 percent of GDP, while Sri Lanka registered 21.5 percent and India 22.4 percent.

Remittances also account for a desired form of earning foreign exchange yet last fiscal year remittances nosedived by 4 billion dollars compared to the year before due to the then finance minister Ishaq Dar’s economically flawed policy of propping up the interbank rupee rate at a time when foreign exchange reserves had plummeted to an all-time low, which did not allow for any market intervention to prop up the rupee, leading to a differential of over 25 to 30 rupees per dollar in the grey market.

Dar’s policy not only led to the revival of the illegal hundi/hawala system that had been crippled due to the Covid-related global lockdown but also to the suspension of the International Monetary Fund’s then ongoing Extended Fund Facility programme.

Two further observations add to this persistently disturbing picture. First, our exports continue to consist mainly of consumer items (from farm products like rice and raw cotton to manufacturing output that is heavily reliant on farm products for inputs, for example, textiles, leather and carpets).

The international demand of these products fluctuates significantly due to global economic conditions (lower demand during a recession) and their pricing is heavily dependent on global supply. And secondly, Pakistan continues to export its surplus output, rather than developing a manufacturing base that is geared specifically for exports.

To get an historical perspective it is relevant to note that Pakistan’s exports to GDP were 13.2 percent in 2013, declined to 12.24 percent in 2014, the first year of the last Nawaz Sharif-led PML-N government, 10.60 percent in 2015, 9.74 percent in 2016 and 8.22 percent in 2017.

Subsequent to the departure of finance minister Ishaq Dar for London, exports to GDP rose to 8.58 percent in 2018, 9.39 percent in 2019 and 10.47 percent in 2022. Thus the decline to 10.5 percent in 2023 certainly reflects a continuing trend evident when Dar holds the finance portfolio.

Moody’s identified factors responsible for Pakistan’s inability to adjust to external shocks: persistent current account deficits driven by low savings and persistently large budget deficits. The recurring current account deficits have compelled Pakistani administrations to seek an IMF programme, Pakistan is currently on its 24th Fund programme, with ever-rising budget deficits sourced to rising revised current as opposed to development expenditure.

Ironically, for the current year’s budget in spite of the extremely narrow fiscal space, made all the narrower with the IMF’s Extended Fund Facility suspended at the time the budget was announced on 9 June, current expenditure was raised by 52 percent in comparison to the budget of 2022-23 and 26.5 percent compared to the revised estimates of last fiscal year.

Pakistan’s private sector savings rate is appallingly low due to high inflation but to compound the folly the money saved in National Savings Centres is used entirely by the government to fund its current expenditure rather than by the private sector to increase productivity.

Moody’s also cited the small inflows of foreign direct investment into Pakistan as a source of concern. While the Special Investment Facilitation Council (SIFC), a body represented by senior army and civilian - federal and provincial - personnel to ensure synchronicity of policy is a step in the right direction yet the government would first need to resolve the ongoing economic impasse as well as political uncertainty before it can succeed in attracting foreign direct investment.

There is therefore an urgent need for the government to implement out of the box policies as well as usher in the necessary reforms and ensure that all contracts with foreign entities are not to the detriment of the Pakistani consumers as is clearly the case with the contracts signed with the Independent Power Producers (IPPs).

This is a tall order but one would hope that implementation of policies to meet these objectives is initiated as so far there appears to be little to provide a level of comfort to the public.

Copyright Business Recorder, 2023

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