The visit of the World Bank Group (WBG) President Jim Yong Kim last week was significant in one way; while for security reasons IMF officials meet Pakistani officials in Dubai, the WBG President diluted that perception. That said he too was economical with the truth or, perhaps for diplomatic reasons, avoided discussing the harsh truths confronting Pakistan's economy. About the same time, the World Bank's (WB) report on 'Global Economic Prospects' was released and, in the context of Pakistan, expressed the hope that during 2016-18 its economy will grow at an average rate of 5.4 percent but feared that the fiscal deficit too was likely to average 5.4 percent of the GDP - an expectation that sounds overoptimistic.
The report also states that while in response to a 1 percent decline in global growth Bangladesh and Sri Lanka witnessed a decline in their GDP growth by 1.2 and 0.5 percentage points respectively, in Pakistan this drop was 2 percent - a slide that is lifting up the poverty line, will restrict a rise in tax revenue, increase the fiscal deficit, and hence the public debt.
Pakistanis would be happy if the WB expectations about GDP growth do materialise, but their worry is the escalating public debt which now equals 65 percent of the GDP because the WB too has warned of the risks associated with it. Given the government's zero focus on purpose-oriented remedial steps, analysts in Pakistan fear a likely default on debt servicing.
What fuels this worry is the government's non-disclosure of the details of inflows under the China Pakistan Economic Corridor (CPEC) - at $46bn, the largest-ever in Pakistan's history - to know precisely the portion of debt therein and the additional annual debt servicing burden (to be borne until 2030) that Pakistan will take on under this project.
During July 2008 - June 2015 public debt increased from Rs 6.74 6 billion to Rs 18.900 billion and debt per capita by two-and-a-half times. This was the "tastiest" fruit of restoration of the "Pakistani" brand of democracy in the country whose supporters quite shamelessly claim doing everything for the benefit of the masses.
The government's stance is that, of the total $46 billion inflow, only $12 billion will be debt and the rest will be Chinese investment in Pakistan, but hasn't clarified the quantum of risk it is assuming by issuing sovereign guarantees to secure Chinese investment because defaults by Pakistani partner entities secured by sovereign guarantees pose a substantial fiscal risk until 2030.
Not disclosing these details is an act of grave irresponsibility because Pakistanis, who will ultimately bear the burden of repaying this debt, must know what economic benefits will accrue from taking on this additional burden, and creation of venues through which Pakistanis will generate the requisite repayment capacity because the economy is slowing down, and exports are declining.
According to the latest Pakistan Bureau of Statistics figures, exports declined by 14.4 percent to $12.087 billion during July-January2015-16 from $14.115 billion in the same period in 2014-15. While imports too declined by 5.4 percent to $25.723 billion from $27.187 billion in the same period in 2014-15, in January 2016, imports went up by 15.4 percent to $3.5 billion from $3 billion over January 2015.
Consequently, in the July-January period, trade deficit surged by 4.3 percent over its comparable level last year. What is more worrying is the fact that drop in exports has gone on since July 2014, and there are no indications that exports will regain momentum. The more disturbing fact is imports haven't declined significantly despite a massive slide in the global oil prices.
Whether this is courtesy entering into (deliberately?) flawed oil buying agreements, or something else, must be investigated to establish the reason for inadequate drop in the monetary value of oil imports. The pricing of LNG being imported from Qatar too remains suspect because the government continually refuses (despite a NAB report faulting it) to disclose the terms of the purchase contract.
In this backdrop(ie increasing debt servicing burden) only remittances by Pakistanis working abroad went up by 6 percent to $11.2 billion during July-January 2015-16 from $10.57 billion in the same period in 2014-15 and prevented the overall external deficit from escalating further, but in January 2016 they too declined by 10.64 percent compared to January 2015.
The WB too has forecast a fall in remittances due to economic slowdown in the GCC countries from where comes a two-thirds of these remittances; this possibility, becoming more certain given the rising tensions in the Persian Gulf, warranted focusing on outlay that could uplift the sliding competitiveness of the export sector. Yet, even basic issues such as tax refunds are being addressed.
On February 13, the Prime Minister promised a zero-rated tax regime for the export sector to help overcome its liquidity crunch, and to eliminate corruption in the payment of refund claims, but promised these relieves to become effective from July 1, 2016. So much for the "businessman" prime minister's concern for the loss of export markets to competitors in the interim period.
FBR insiders are of the view that while the fiscal impact of zero-rating the export sector could be between Rs 6 billion to 10 billion, the real killer is the delay in refund of taxes (estimated to be well over Rs 200 billion) that has been causing illiquidity in the export sector - problems that have worsened because banks now prefer to lend to the state and the corporate sector.
According to media reports, while the Prime Minister expressed his government's inability to refund taxes in one go (that permitted reporting lower than actual fiscal deficit), he promised the immediate release of "small" refunds and issue of government guarantees for the large unpaid refunds (another route to covering up the real fiscal deficit) which could serve as securities for bank borrowing.
Reporting less than actual fiscal deficit implies deception prompted by a desire to hide resource waste and corruption, although both are eventually exposed, as happened in case of many controversial current and development expenditures. No one therefore knows how large the fiscal deficit is; lack of focus on generating resources, especially external, makes it mere guesswork.
Given the almost un-curable weaknesses in the judicial system, instead of improving their risk monitoring, ie, loss limiting abilities, banks have opted for lending to the government, as reflected by the fact that over 50 percent of bank credit is now going to the government, while the huge SME sector - backbone of every economy - is being denied financial resources.
This is hardly the setting wherein Pakistan could generate the capacity to service its mounting external and domestic debt; the fact that, instead of devising rational and socially least controversial strategies there for, the process of privatising loss-making SOEs (and generating huge resources there from), is being turned into a contest between the state and the SOE employees, makes it worse.
By relying on deception instead of reversing these developing negative realities, the future is being made more uncertain and more investor unfriendly.