The 11-month balance of payments data released last week by the SBP has borne out the apprehension that the external account deficit is headed for a surge beyond expectations. As against 4%, projected for the year ($12 billion), first it was believed that the year would end at about 5% ($15 billion). However, now all indications are pointing that it is likely to end at 6% of GDP, highest in more than a decade.
Consequently, the reserves are down to a dangerous level of $10 billion, which, based on recent monthly imports of more than $5 billion, are less than 2 months of imports. The growth in imports was fairly strong at 16%. Exports also rose by 13%, which is a good sign, but exports are less than half the imports and, therefore, their growth is no match to the growth of imports. We are also facing rising international prices of oil, which are hovering around $75/barrel (together with a weakened rupee), that would lead to a rising import bill at a time when the demand for energy is rising. Just look at the LNG imports in 11 months: from $1.2 billion last year, they rose to $2.2 billion, a staggering increase of 84%. On the other hand, the overall demand for petroleum imports increased by 30%, with all individual products showing a rising trend. Now, this means that LNG is an additional fuel and has not led to any substitution. Given the fact that LNG pricing is linked to international oil prices, a new channel of dependence on imported energy has been opened, which would be a source of destabilization. There are reports that a circular debt (CD) on LNG payments has also started building up, which would add to an already precarious power sector CD beside posing greater risk of non-payment on foreign obligations given how closely the LNG contracts are tied with international letters of credit with gas supplying countries.
It is in this background that the Moody's rating agency has downgraded the outlook portion of Pakistan's rating from 'stable' to 'negative'. Until recently, the agency had not expressed any concern, but things have deteriorated so fast that it was constrained to issue its initial warning. It is clearly a first step in full downgrade (B3 to C category), which would inevitably follow unless major repair job is undertaken. The agency has cited rising foreign exchange needs of the country because of high indebtedness in the face of depleting reserves.
The external account position is understandable when one looks at the unbridled growth in fiscal deficit. We had given a detailed evolution of how government has kept changing the deficit figure during the year (BR: 20-6-2018). In 11 months, the deficit has widened to 6.1% or Rs 2.1 trillion, which is way above the budgeted level of 4.1% or Rs 1480 billion. Furthermore, it is estimated that at the year-end, the deficit could touch as high a rate as 7% or Rs 2408 billion. This is a phenomenal increase in public spending, eventually translating into a high import demand pushing down the reserves to an unsustainable level.
On the other side, there are festering issues that continue to linger in the background and carry a major risk of further fiscal disruption. The most significant is the power sector CD, which rose to Rs 571 billion as revealed last week before a parliamentary committee. It was also reported in the same meeting that the government has cleared Rs 200 billion during this financial year. These are staggering numbers and not commensurate with the fiscal space available to the federal government. This cost is not the cost of supplies, but largely due to incurring higher losses than allowed by the regulator and not collecting a significant part of the bills. The tariff differential subsidy (TDS) is over and above these cash shortfalls. Now, if these costs cannot be controlled then to expect budget to pick such costs would be to pave the way for fiscal insecurity.
Then there is the frozen price of gas for nearly four years. Except once in the last five years, the government has not adjusted the gas prices. Partly it was justified as international oil prices had rapidly declined. But that phase has long passed. The Ogra last week announced that an average of 46% increase in gas prices for the two utilities (SSGC, SNGPL) would be required based on the gas supply agreements signed with the E&P companies. The Ogra law requires it to make the determination and send it for government consultation before notification. A period of 40 days is allowed for this purpose. This is where the distortion creeps in. Even after the 40-day period, Ogra would typically give more time to government, which, until now, has been evading the unpleasant job of deciding the increase. So long as the decision is delayed, the two companies would suffer and the E&P companies would not be able to get their due revenues that would affect their E&P activities.
The problem of privatisation is no less pressing. The haemorrhaging of national exchequer through PIA, Pakistan Steel, erstwhile Wapda companies, Railways and many more enterprises is weakening the fiscal finances (besides building a great of contingent liabilities) as well as the efficiency in the economy. This is again a reform that was abandoned midway and its full benefits could not accrue.
The national economy, therefore, is facing an unprecedented crisis. The only good thing going for the economy is strong growth and, so far, relative price stability. That's more to do with the overall activity of the private sector and the reforms government did in its first three years in office. But as we approach the transition to a new government, we find a great deal of similarity between 2013 and 2018. The same fiscal and external account deficits are staring us with their menacing eyes and without seeking outside help, it would be nearly impossible to bring the troubled economy from rough waters to the shore.
One had hoped that the Interim Government would take a serious notice of the situation and would take some corrective actions. But it turned out that they have been shackled to do only routine work of their office and not engage in any serious policy revision or initiate a dialogue for outside help. Under the circumstances when a new Government comes to the office, it would face an extremely challenging economic situation and would be loathed to take a series of highly unpalatable decisions. This would be politically costly and hence a great deal of statesmanship would be required the escape the temptation to delays. The pain of adjustment has to be faced. Its extent would be less the earlier the corrective steps are adopted.
(The writer is former finance secretary)
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