The current election euphoria in the country is beginning to exact its toll on country's economy. The numbers are worrisome, which will worsen as we move towards the election day. Many of the hard and unpopular decisions which should have been taken by the last government were left to the caretakers with a view to avoiding political fallout. The caretakers have little to offer to arrest the economic slide.
That numbers appear bad is a fact. Foreign Direct Investment (FDI) witnessed a drop of a massive 26% to $237.9 million in May 2018, apparently due to political uncertainty ahead of the general elections. FDI stood at $322.7 million in the same month of last fiscal year, according to the State Bank of Pakistan (SBP).
Cumulatively, in 11 months, FDI slightly decreased 1.3% to $2.47 billion compared with $2.50 billion in the same period of FY17. The decrease in investment comes at a time when the country is facing huge pressure on foreign currency reserves. Overseas Investors Chamber of Commerce and Industry (OICCI) Secretary General M Abdul Aleem has said, "[T]he drop in foreign direct investment (for 11 months) is not as bad as it could have been, considering the political uncertainty in the country for the last six months."
Pakistan's current account deficit widened to $15.961 billion, or 5.5 percent of Gross Domestic Product, in the first 11 months of the current fiscal year of 2017/18, as trade gap continued to widen. Ex-Finance Minister Salman Shah has said the biggest concern now is "how the interim and the new government will finance the huge current account deficit and meet external debt obligations".
Shah said: "There are economic concerns for the foreign investors as the country faces balance of payments difficulties. The heart of the negative sentiment among foreign investors is the balance of payments." Exports rose by 15.3 percent to $21.345 billion in the July-May period while imports increased by 14.2 percent to $55.232 billion during the first 11 months. Oil imports surged 30.4 percent to $12.928 billion.
The SBP's foreign exchange reserves stood at $10 billion during the week ended on June 8, which can cover less than two months' of imports. A fragile external account position has compelled the SBP to allow the decline of Pakistani rupee that has now weakened over 15% in the last seven months after three separate rounds of devaluation.
There was an outflow of $161.9 million from Pakistan Stock Exchange in the July-May period compared with a $391.7 million outflow in the same period of the last year. Remittances from overseas Pakistanis, however, increased 2.8 percent to $18.028 billion in the first 11 months. Net inflows in the power sector rose to $760.5 million in July-May from $633.1 million a year earlier. Construction-related businesses fetched $632 million worth of foreign investments in 11 months as against $416.4 million recorded in the corresponding period of FY2017, SBP's data shows.
Perception-driven Moody's Investors Service has downgraded the outlook on Pakistan's rating to negative from stable and affirmed the 'B3' local and foreign currency long-term issuer and senior unsecured debt ratings. The decision to change the outlook to negative is driven by Pakistan's heightened external vulnerability risk, added the ratings agency.
"Foreign exchange reserves have fallen to low levels and, absent significant capital inflows, will not be replenished over the next 12-18 months," stated Moody's. "Low reserve adequacy threatens continued access to external financing at moderate costs, in turn potentially raising government liquidity risks." Moody's also said it expects the government's tax amnesty scheme will have a modest impact of around $2-3 billion in foreign exchange inflows.
The Asian Development Bank (ADB) had endorsed the privatisation process of loss-making entities in the private sector. Piqued by government inaction, the ADB has cancelled an approved loan of $20 million for a project. The loan was aimed at strengthening the government's capacity to privatise and restructure its designated public sector enterprises (PSEs) and strengthening the privatisation programme. ADB announced on Wednesday that the privatisation programme has been slowed down even further and remain largely on hold to date, therefore funds from the loan were no longer needed by the government.
A loan component was also allocated to energy sector reform monitoring, as ADB supported the government's reform activities through sustainable energy sector reform programme from 2013 to 2017. It is reported that the country's energy sector's circular debt soared to Rs 547 billion in June 2018 due to low recovery, high losses, mismanagement and non technical bureaucracy. The stock of circular debt is over and above Rs 500 billion loans parked in the books of Pakistan Power Holding Private Limited (PHPL) and interest on these loans is being paid by consumers through surcharges.
The current wave of load shedding is more out of financial and governance issues rather than for lack of generation capacity - as touted by the government. Khalid Mansoor, CEO Hubco, who is also Chairman Independent Power Producers Association, has informed the Senate Special Committee that public sector Generation Companies (Gencos) produce less electricity due to paucity of funds. Private sector investors have, therefore expressed apprehension that Chinese investors may withdraw their investment from the sector due to late payment of their dues.
The economic situation is indeed bad and needs to be addressed without any further loss of time. But, the caretaker government cannot do much because they are there not for short-, medium- and long-term planning and decision-making; their job is to deal with day-to-day affairs.
(The writer is the former President of Overseas Chamber of Commerce and Industry)