ECONOMY: Follies and more of them
THE national economy spent most of 2012 recovering from the damage done by the break up in ties with the United States in the aftermath of the Salala incident. The strained relations with the superpower resulted in an interruption in all foreign exchange inflows other than exports and remittances, which by themselves are inadequate to meet the economic needs. The strained relations also led to the issuance of a harsh report by the IMF, since without superpower patronage, the Fund was free to comment on Pakistan’s reform effort on economic merit alone.
The year can be said to have begun by this cry in the wilderness from the State Bank: “Pakistan must make all efforts for the resumption of financial inflows.” The statement was contained in the Annual Report of the central bank, issued in December of 2011, when the confrontation with the United States was at its peak.
Financial inflows of the sort called for in the report did not resume until August of 2012, when a $1.1 billion payment under the Coalition Support Fund (CSF) was made after Pakistan gave permission for the resumption of Nato supplies. The funds helped stem a growing deficit in the current account for the first quarter of the new fiscal year and helped shore up the rupee to some extent.
But by early second quarter the effect of this inflow had been digested. Foreign exchange reserves resumed their downward spiral, falling below the psychological level of $10 billion in October and prompting an accelerated slide in the value of the rupee.
The year 2012 has seen the start of repayments to the IMF of the money borrowed from the IMF in 2008. Pakistan repayed more than $2 billion to the IMF in 2012, and the payments are set to accelerate in 2013. The net outflows from debt repayments were not matched by any corresponding acceleration in the inflows, resulting in heavy pressure on the external account, which found temporary reprieve in August due to one CSF payment, and another small CSF payment in December.
Caught between dwindling inflows and an accelerating repayment schedule, Pakistan has struggled to maintain the viability of the outlook on its external account. The situation has led many to conclude that Pakistan needs to get back onto an IMF programme very quickly in order to arrest its gradual slide towards a balance-of-payment crisis of the sorts that have punctuated its recent history.
This fear has been magnified by the approaching elections. A looming election calendar has wrought havoc with the state of public finances. By December, the State Bank was warning that almost Rs615 billion had been pumped into the banking system in order to meet government borrowing requirements. The amount is only slightly less than a quarter of the total tax revenue for the entire current fiscal year. If government borrowing has already prompted interventions of this scope and magnitude from the central bank, then the fiscal situation is clearly set to deteriorate further as the elections approach and the power is transferred to a weakly constituted interim government.
The scope for a substantial strategic decision by an interim government is going to be limited. For its part, the IMF also signalled, in a programme note issued in November, that it is reluctant to engage with Pakistan without “strong ownership and broad-based support” for a far-ranging reform programme. An interim government is unlikely to be able to muster either of these.
The fears that have incubated in 2012 are, therefore, set to come to full fruition in 2013. Pakistan’s search for concessionary inflows that help meet its growing debt service expenditure has already prompted concerns in 2012, and they are going to grow in scale throughout 2013. This search will coincide with a progressively weakening government mandate as elections approach.
Nobody believes that the international community will stand by and let Pakistan slide into a full-blown crisis. A financial calamity is likely to force the hand of the international community and set aside any reservations related to the politics of the reforms. Nevertheless, this is a dangerous gambit for a large country to be playing and the policy drift in the face of the enormous vulnerability opening up before us is a hallmark of the year 2012.
The year gone by was the year of anxiety for Pakistan. A troubled relationship with friends and creditors does not befit a country with large external obligations. Yet, such a troubled relationship is exactly what the leadership has sown in the year, and now the bitter fruits of that harvest are on their way. The year 2012 should, therefore, be remembered as the year of folly for Pakistan.
The writer is a Karachi-based journalist covering business and economic policy.