Prime Minister Imran Khan while addressing the passing-out parade of Islamabad police on Wednesday stated that the present government inherited a historically high current account deficit and his government’s biggest achievement has been a current account surplus for the past five months while the primary deficit (excluding debt repayments) is also in surplus (debt accumulation blamed entirely on previous administrations) and a dramatic rise in remittances.
The Prime Minister’s claims of achievements are backed by data uploaded on the SBP website in a table titled Summary Balance of Payments as per BPM6 November 2020. The current account surplus for July-November 2020 was 1.6 billion dollars against a deficit of 1.7 billion dollars in the comparable period of the year before, though this was achieved at the cost of an appallingly low growth rate of 1.5 percent (projected for last year pre-Covid19) with a consequent negative impact on employment and tax collections. Remittance inflows rose to 11.7 billion dollars in July-November 2020 against 9.2 billion dollars in the comparable period of the year before – an achievement partly attributable to the cessation of hundi/hawala activities sourced to global lockdowns post-Covid19 as well as lump sum redundancy payments to Pakistani nationals with multilaterals projecting a fall in our remittances. In other words, the rise in remittance inflows may not be sustained as they cannot be sourced entirely to the SBP policy changes to facilitate overseas Pakistanis to legally remit their earnings and/or indicative of their vote of confidence in Prime Minister Khan’s honesty.
Notwithstanding these achievements the Prime Minister needs to now focus and understand five other components of the same table on the SBP website which reflect a very disturbing picture. First, trade (goods and services) July-November 2020 indicated a deficit of 9.538 billion dollars against negative 9.553 billion dollars in the comparable period of last year – or in other words, a marginal fall in trade deficit in spite of the rush of export orders post-Covid-19 partly because of India’s inability to meet those orders due to a pandemic. Pakistan’s export sectors have been voicing their concerns with respect to gas shortages that may compromise their ability to meet their scheduled delivery deadlines while imports are expected to rise due to the steady rise in the international price of oil. Again, this slight improvement may not be sustained.
Second, net lending inflows July-November 2020 registered positive 1.74 billion dollars (in our accounting system a positive figure reflects a net outflow as opposed to net inflow) against negative 1.5 billion dollars in the comparable period of last year. This implies that more money is leaving the economy (inclusive of repayment of past loans as and when due and outward remittances) than is coming into the economy. In this context it is relevant to note that in Table 10 in the IMF’s July 2019 documents uploaded on its website titled Request for an Extended Arrangement Under the Extended Fund Facility, 13.5 billion dollars are cited as amortization for 2020-21 with the SBP Table giving the total paid for July-November at 3.3 billion dollars or in other words 10.3 billion dollars is required by the end of the fiscal year (minus the 1.7 billion dollar debt deferment by the G-20) - an amount unlikely to be generated through a trade surplus (a desired form of earning foreign exchange) or a further rise in remittance inflows and may be at a higher cost of borrowing than was calculated by the Fund in July 2019 especially if the second mandatory IMF review talks remain inconclusive.
Third, net incurrence of liabilities by the SBP is negative one billion dollars July-November 2020 (the amount recently repaid to Saudi Arabia with one billion dollar outstanding though it is not clear when Saudi Arabia would call that in). And while short-term debt declined to 261 million dollars in the first five months of the current year against 899 million dollars in the comparable period of the year before yet long-term debt rose from 1.99 billion dollars last year July-November to 3.1 billion dollars in the comparable period this year.
Total disbursements declined to 3.4 billion dollars in July-November 2021 against 3.88 billion dollars in the comparable period last year (with IMF credit/loans given as zero against 991 million dollars in the comparable period last year).
Fourth, while amortization declined from 2.6 billion dollars July-November 2019 to 2.4 billion dollars in the comparable period in 2020 (no doubt due to deferment of repayment as and when due by G20 to help poor countries cope with Covid19. However dues to the International Monetary Fund (IMF) are not viewed as liabilities by the SBP accounting system yet IMF does include what is due to it in its calculations and one would assume that this would be currently very much on the table as talks between the Fund and the authorities on the second mandatory review proceed.
Fifth, gross reserves are cited as 14.4 billion dollars in July-November this year against 11 billion dollars last year but ignored is the fact that it includes (i) deposits from another central bank or in other words a swap arrangement with China is included in reserves but not as a liability though it is clearly a debt; and (ii) foreign currency swaps with commercial banks are debts but not included as liabilities. Foreign reserves are thus strengthened by borrowings, a practice reminiscent of the economically mismanaged Ishaq Dar years.
In a recent interaction with the media the Prime Minister stated that he has been informed that the only bone of contention with the IMF relates to the power sector, though he blames it on mismanagement by previous administrations rather than his own team (reflected by the fact that circular debt was raised by a whopping 1.2 trillion rupees during his two and quarter year tenure to 2.3 trillion rupees) as well as his justified resistance to raising rates due to the second wave of Covid19. Ignored is the fact that the power sector team, like its predecessors, is focused on achieving full cost recovery not through improving its own performance but by passing the buck onto the hapless consumers by raising rates.
To conclude, the Prime Minister is being misinformed by not only the power sector team but also his economic team leaders as the IMF has serious multiple macroeconomic concerns relating to not only the lack of implementation of structural reforms (particularly in power and tax sectors) but also with respect to the source of foreign reserves. One can only hope that the Prime Minister familiarizes himself with the real impact of economic data available on ministries/SBP websites as well as on the IMF website.
Copyright Business Recorder, 2020
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