The external scorecard is getting red with every passing quarter; and now the weekly numbers are becoming crucial. The reserves are falling at a steady pace of $200-250 million per week for last six weeks and at this pace, without additional external debt, the IMF programme is three months away, assuming the Fund intervention is inevitable once the SBP reserves are below 2 months of import cover.
On the flip, the growth momentum continues. The LSM despite some dip in last two months is growing at a decent pace. The consumer and construction boom continues as auto sales and cement dispatches are still showing promising growth. And inflation is still subdued, even after rounds of depreciation in the first half of the fiscal year as domestic commodity prices are already higher than international counterpart.
The only issue, a big one though, is financing the growth momentum? The domestic economy jewels are real and resilient, but the country does not have ample external resources to fuel the growth which is taking imports to unprecedented levels. Monthly imports in January were $5.6 billion. Highest ever by far (previous high was $5.1 billion in May 2017).
The problem does not appear out of the blue as imports started moving north sharply as the economic growth started gaining momentum. The PMLN government in the eighteen quarters of its regime so far has relied on external debt to sustain the growth momentum by not letting the reserves fall and not letting the currency depreciate to its supposedly real value, based on REER computation done by the IMF and published by the SBP.
From Jun13 to Dec17, the country’s foreign reserves increased by $9.1 billion to $20.1 billion while the total net external debt increased by massive $27.9 billion to reach $88.9 billion (27.3% of GDP). In case of public debt, the net increase stood at $19.3 billion in the same time to reach $70.5 billion (21.7% of GDP), while SBP foreign reserves are up by $8.1 billion.
Pakistan, in simple words, has consumed $18.9 billion of debt (increase in debt minus hike in reserves) in thin air - out of which $11.2 billion is eaten by the government while the private sector (including PSEs) has swallowed $7.7 billion of debt. In relative terms, the private sector debt increase is unprecedented and its utilization efficiency probably would be higher than government’s fiscal use.
This debt may be partially used in future consumption as the expansion in energy, auto, steel and cement, and other sectors may help the country grow in years to come. However, the major chunk is consumed for better today at the cost of bitter tomorrow. That is the fate of an economy where national savings rates are persistently below 15 percent and every investment/ high consumption cycle is financed by foreign savings.
The trend is simply not sustainable; and it is matter of time before the growth momentum becomes a casualty to external woes. This has happened before in the economy and history may be repeating itself. The situation has become precarious in the last few months - in 2QFY18, the net public external debt increased by $3.5 billion while the reserves remained virtually unchanged during that period.
And the situation is becoming more worrisome in the third quarter as the reserves are falling fast while raising further external debt, without IMF nod, is becoming increasingly difficult. According to news items, the government has raised $6.6 billion in gross debt so far in this fiscal year, out of which $1.6 billion is from China. Mind you, in FY17, China supported the economy with around $5 billion of debt as well.
Out of $6.6 billion gross debt in 7MFY18, $1.6 billion from China, $2.5 billion from Euro bond/Sukuk, $1.6 billion from multilaterals, and $722 million short term borrowing from commercial banks (minus China). The reliance of debt is increasingly falling on short term expensive borrowing which is not good.
Anyhow, the gross public external debt this year so far is $6.6 billion while the SBP reserves fell by $3.3 billion, to make the gross financing requirement equal to $9.9 billion for 7MFY18. At this pace, another $6-7 billion financing is required for remaining fiscal year; and it is critical to see how much China pours in to avert an IMF programme. What next? Who cares? It is the responsibility of next government!