The entity is bankrupt: surgery is required – II – Opinion

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The most authentic document on the (organized) economy of Pakistan is the Pakistan Economic Survey. The survey for 2020-2021 indicates that the sustainability of the external debt is as follows:

External Debt Sustainability: A country can achieve debt sustainability if it can meet current and future debt service obligations on time without exceptional financial assistance.

Misaligned economic policies of the past, including large budget deficits, lax monetary policy, and the defense of an overvalued exchange rate, fueled consumption and short-term growth, but regularly eroded macroeconomic buffers, increased debt external, inflated the current account deficit and depleted international reserves.

The current account deficit was recorded at a record high of US $ 19.2 billion in 2017-18. The external account has improved considerably during the term of the current government.

In 2019-2020, the current account deficit (CAD) stood at US $ 4.4 billion. The decrease in the CAD has considerably reduced the country’s need to organize external financing. The external sector continues to strengthen and after remaining positive for the 10 months of the current fiscal year, the cumulative current account balance was recorded at a surplus of US $ 0.8 billion between July 2020 and April 2021. .

This turnaround was supported by an improvement in the trade balance and a sharp increase in remittances. The external public debt / foreign exchange reserves ratio improved and stood at 4.1 times in 2019-20 against 5.1 times in the previous year, due to the slowdown in new accumulation debt and the increase in the country’s foreign exchange reserves.

The growth in external public debt service mainly due to Eurobond and commercial loan repayments which exceeded the growth of FEE and, as a result, the ratio of external public debt service to foreign exchange earnings increased to reach 20.4% in 2019-20, against 17.2% in 2018-19.

Pakistan’s external debt remains on a sustainable path, which has also been approved by the IMF. As the balance of payments situation improves, external debt sustainability is expected to improve further in the future.

Sustainability was considered on the grounds that the current account situation had improved considerably. The worst economic management of the country’s external account appeared in 2017-2018 (the last year of the PML-N government) which improved considerably over the following years. The only factor that raised optimism in the above survey was the improvement in the balance of payments situation in the following years. It is regrettable that the basis of this optimism has gradually eroded because for the current year (July 21 to June 30, 2022) the current account deficit is expected to exceed $ 10 billion. The issue of sustainability must therefore be considered within the framework of the revised paradigm.

Pakistan’s total external debt is approximately USD 127 billion, of which a substantial amount is due for principal payment over the following five (5) years. On the assets side of the balance sheet, the State Bank of Pakistan’s reserves figure is compared to US $ 25 billion. So the net liability is around $ 100 billion. By a conservative estimate, the amount owed for retirement over the next five years is over $ 40 billion. The fundamental question is whether or not the country will be able to repay this debt given the expected current account balance over the next five years. The situation is not satisfactory, to say the least.

Read the first part here: The entity is bankrupt: surgery is required – I

With the current economic configuration of the country, it is not expected that there will be a substantial change in the indicators of imports, exports and foreign remittances. Even though there are some changes on the positive side, the current account balance is expected to remain around $ 10 billion in negative for the next five years.

In simple cash terms, there is a liability of $ 100 billion, of which about $ 40 billion is payable over the next five years. Over the next five years there will be another $ 50 billion outflow. Thus in terms of cash the entity is in difficulty for which a serious restructuring is necessary. It is not a political subject. This goes to the very essence of Pakistan’s economic future. If we take the conservative estimate and are able to reschedule existing debt or secure new debt, the position at the end of the next five years will be net debt of $ 177 billion.

With this type of cash projection for the country’s external account, it would be very difficult to maintain the USD-Rupee parity at a reasonable level for the country and there will be pressure on the increase in the prices of imported commodities such as as petroleum, RLNG and edible oil. In my talk to prospective Hamdard University graduates on December 15, 2021, I referred to this position and the fact that people in general appreciated the timely identification of the grave current account situation in Pakistan. In a recent speech in Lahore, Prime Minister Imram Khan indicated that the mere substantial increase in exports can lead to substantial economic growth in the country. As the Prime Minister has rightly pointed out, Pakistan is caught in a vicious circle in this area. In the history of Pakistani economy, increasing GDP growth to over 4-5% leads to a disproportionate increase in the import bill, resulting in an unsustainable situation. It happened last year. This therefore shows that there are certain structural defects in the country’s economic model which lead to virtual bankruptcy as soon as growth exceeds a certain benchmark. This effectively means that, on the whole, there is no effective “added value” and that the country is gradually moving towards unsustainability. This is exactly what was revealed in the much-cited conference on December 15, 2021.

With a steady increase in the population above the international average and an apparent handicap in the growth rate to a certain level due to weak external accounts, there does not appear to be a solution to the country’s financial problems in the region. current paradigm. This requires a re-examination of the country’s import and export invoices. The observations made in the official document for the month of September 21, 2021 are as follows:

IMPORTS

In terms of US dollars, imports in September 2021 were $ 6,595 million (provisional) compared to $ 6,577 million (provisional) in August 2021, an increase of 0.27% and 53.48% from to $ 4,297 million in September. 2020.

Imports during the period July-September 2021 totaled Rs 3,077,368 million (provisional) against Rs 1,881,327 million during the corresponding period of last year, an increase of 63.57%.

In terms of US dollars, imports during the period July-September 2021 totaled $ 18,747 million (provisional) compared to $ 11,286 million in the corresponding period last year, an increase of 66 , 11%.

The main products imported in September 2021 were petroleum products (Rs 106,932 million), drugs (Rs 77,003 million), crude oil (Rs 73,276 million), liquefied natural gas (Rs 62,717 million), palm oil (Rs 52,792 million). , plastics (Rs 42,531 million), iron and steel (Rs 40,154 million), mobile phones (Rs 35,126 million), scrap and steel (Rs 32,266 million) and machinery. electricity production (Rs 31,920 million).

If we eliminate all of the major import items, namely petroleum products, medical products, natural gas and RLNG, iron and steel, and mobile phones, it appears that with respect to almost all of these articles, we have made and continue to make fundamental errors in our importation. Politics. We consume palm oil, which was an unknown commodity about 50 years ago. We forgot to use cottonseed oil and other locally produced oils. In order to appeal to the import-based trade lobbies, the interest of the national economy has been set aside. In the case of mobile phones, we allow the import of branded mobiles costing over Rs 150,000, while the same China-made mobiles are available for under Rs 25,000. In Part I of this series of articles , I have already identified the problems related to energy imports.

The conclusion up to this point in the analysis is that the entity will not be able to service its debt in the foreseeable future. New loans would be needed to repay existing loans. When the future projections are no better than the previous ones, the terms and conditions of the new loans will be more stringent with a higher net liability for the country. Unless and until the fundamental structuring of the business model is done, the entity (Pakistan) will remain in dire financial straits.

(To be continued)

Copyright Business Recorder, 2021


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