No, Pakistan is not out of financial crisis! Their top bank governor's remark doesn't make sense

Tariq Bajwa, the Governor of Pakistan's central bank, yesterday announced that the country's economy has been set on the right path with the help of friendly countries but the numbers tell a different story

By BusinessToday.In  
Tuesday, February 19, 2019

Even as a livid India is pulling out all stops to get the Financial Action Task Force (FATF) to blacklist Pakistan at the ongoing meet in Paris - a move that spells dire consequences for an already cash-strapped economy - the neighbouring country is optimistic that it has turned a corner.

Tariq Bajwa, the Governor of Pakistan's central bank, yesterday said that Pakistan has come out of the financial crisis with the help of friendly countries and the economy has been set on the right path. He added that a plan had been prepared to eliminate the current account deficit.

His comments came just a day after Pakistan and Saudi Arabia signed a slew of investment agreements worth $20 billion. "It [the investment] is big for phase one and definitely it will grow every month, every year in bigger numbers and it will be beneficial for both the countries," Saudi Crown Prince Mohammad bin Salman said on Monday, adding that Pakistan has the potential to become one the top 20 economies of the world.

However, the numbers tell a different story. As per data from the Asian Development Bank, Pakistan's GDP growth in the current fiscal so far stands at 4.8%, lower than even Nepal (5.5%). In comparison, Bangladesh is growing at 7.5% and India's GDP is at 7.6%. Moreover, Pakistan's latest GDP figures have slipped from 5.4% in 2017 and 5.8% in the following year.

Standard & Poor's had downgraded Pakistan's long-term credit rating last month to 'B-Negative' and said the GDP growth rate would fall to 4% this year (2019) then stay at 3.5% for the next two years and fall further to 3.3% by 2022.  

Inflation, on the other hand, has galloped to a four-year high of 6.5%, up from 3.9% in 2018. This is the highest in the Indian subcontinent, including India, Bangladesh and Nepal. According to Reuters, Pakistan's jump in inflation comes after its central bank devalued the currency five times since December 2016, weakening it by 26% against the dollar during that period. On a month-on-month basis, prices increased by one percent in January.

Then there's Pakistan's current account deficit (CAD), which had badly hit the economy during the current financial year - the 2019 forecast stands at -5%. It rose to $7.9 billion in the first half of the current fiscal year and the CAD is likely to reach $16-18 billion by June 30, reported IANS.

The country's foreign currency reserves have reportedly dwindled to around $8 billion, just enough to cover about two months of imports. In order to avoid a balance of payments crisis, Pakistan previously reached out to Saudi Arabia and China and is currently in talks with the IMF for a second bailout in five years.

A surge of imports was the main reason for the widening CAD. In FY2017 it stood at $12.4 billion, equal to 4.1% of GDP and well up from 1.7% a year earlier. The trade deficit reached $26.6 billion till June 30, 2018 as imports increased by 17.6%.

India's recent decision to raise the customs duty on all goods imported from Pakistan to 200%, including fresh fruits and cement, could rock the boat further. Pakistan's exports to India stood at $488.5 million (around Rs 3,482.3 crore) in 2017-18.

A recent UN report, titled "World Economic Situation and Prospects 2019", also pointed out that Pakistan's "level of public debt is also high-close to 70% of GDP-with rising sustainability concerns". Total public debt equalled 67.2% of GDP in FY2017, essentially unchanged from a year earlier, continuing to breach the Fiscal Responsibility Debt Limitation Act ceiling of 60%. Public external debt and liabilities meanwhile rose to 20.6% of GDP. The cost of external debt servicing rose again to 2% of FY18 after having declined to 1.6% in the preceding three years.

The socio-economic statistics also leave a lot to be desired. "Half of Pakistan's population is at poverty line while 20 per cent people [out of a total population of 220 million] are living below poverty line," Pakistan Prime Minister Imran Khan said while addressing the World Government Summit in Dubai recently.

So, given the above, it's safe to say that Pakistan's economy is nowhere close to being out of a financial crisis. Bawja's comments that the country's economy was "capable of meeting all economic challenges", for the moment is little more than wishful thinking.

With agency inputs

 

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