AMID firefighting on terror financing and external-account fronts, and heightened political uncertainty ahead of general elections in mid-July, it seems Pakistan will miss economic growth target of six per cent set for this fiscal year ending in June.

The Foreign Office has confirmed that the Paris-based intergovernmental watchdog on illicit finance will put Pakistan on its so-called grey list from June after we submit an action plan in May.

Foreign Office spokesman Dr Muhammad Faisal has said that authorities are preparing an action plan and has ruled out the possibility of black-listing by the Financial Action Task Force (FATF) that is reserved for countries that decline to cooperate.

As the Ministry of Finance is now busy finalising the action plan for the FATF, banks and businesses are readying themselves to brave the tough times ahead. “It’s not the FATF grey-listing that makes us a bit uneasy. We were on the list before. It’s the timing and background of the move that is troubling,” says a senior executive of a large local bank.

Growing external debt servicing that keeps depleting SBP reserves and the imminent FATF action can squeeze room for launching new bonds

“The fiscal year ends in June, general elections are due in mid-July and as such political uncertainty is at its peak. Add to it our worsening current account position and you can understand that being back on FATF watchlist is unfortunate for Pakistan.”

But can the placement again on the watchlist amid changed geopolitical environment, rising trust deficit between the United States and Pakistan and our worsening external account turn out to be as inconsequent as the government wants to make us believe? Only time will tell.

External account

Qaiser Ahmad Sheikh, chairman of the national Assembly’s Standing Committee on Finance, Revenue and Economic Affairs, has expressed concern over a ballooning current account deficit amid growing stocks of external debt.

During a recent meeting, the committee noted that the country needs $7 billion within this fiscal year just to check the current account deficit that soared to $9.156bn in the first seven months of the current fiscal year from $6.182bn in the year-ago period.

Pakistan’s overall external debt and liabilities jumped to nearly $89bn in December 2017 from a little less than $76bn in December 2016, pushing up the cost of external-debt financing and thus putting pressure on our balance of payments.

Expanding current account deficit, primarily owing to a high growth in the import bill, has shaved off $3.8bn (or about 23.5pc) from the central bank’s forex reserves during this fiscal year.

These reserves fell to $12.345bn on Feb 23 — barely enough to cover three months of imports — from $16.145bn at the end of June.

Growing external debt servicing that keeps depleting State Bank’s reserves and the imminent FATF action can squeeze room for launching new editions of sovereign bonds at affordable rates.

Fresh borrowing from the International Monetary Fund (IMF) for fixing balance of payments problems ahead of the elections is politically out of question. Moreover, the privatisation plan for massive state-run entities like Pakistan International Airlines and Pakistan Steel looks next to impossible.

Economic growth

Deteriorating external account, fiscal problems like a decline in the number of taxpayers, ballooning circular debt of the energy sector and growing domestic debt are all affecting overall economic growth. All indicators suggest that Pakistan would miss the 6pc GDP growth target during this fiscal year.

SBP Governor Tariq Bajwa said in a recent interview to a local daily that growth this year could reach to 5.8pc. Moody’s in its Feb 28 report estimated that growth could be 5.5pc. It said that growth momentum is spurred by solid domestic demand and rising manufacturing output, infrastructure investment related to CPEC projects, and reforms achieved under the previous IMF programme.

The international credit rating service, however, warned that economic growth is susceptible to rising political tensions, renewed security and terrorist-related unrest and a weaker rupee reflecting a build-up of external pressures.

Sustainable growth

For central bankers and for other economic managers, too, a possible slippage of the growth target is perhaps not that important as is the sustainability of growth.

However, a lower than targeted growth means less jobs for people and less increase in income levels of ordinary Pakistanis. For political leaders, ensuring a growth closer to 6pc in an election year is more important than its sustainability in the medium to long run. They always love to leave the sustainability part for the next government to take care of.

That is where economic managers still feel constrained in implementing the policies that they believe are good in the long run.

“If you raise the policy rate by 25 basis points after keeping it stable for a long time ahead of general elections, it’s not going to sink into political heads why it is necessary now,” says a member of the monetary policy committee of the central bank.

The SBP raised its policy rate from 5.75pc in late January as a shock absorber of anticipated inflationary pressures. After the latest upward revision, local petroleum prices have already hit a three-year high. This could push up headline Consumer Price Index inflation in the coming months from 3.8pc in February even if GDP growth remains below the target as domestic consumers-led demand for goods and services remain high.

Uneasy calm

Interactions with executives of major local banks show that even after getting a prestigious B3-stable outlook from rating agency Moody’s, our banks are apparently not feeling so cool. An uneasy calm prevails perhaps owing to pre-general election political uncertainty and looming FATF action in June.

Moody’s said in its report that despite margin pressures banks’ profitability would remain flat during this year. It cited three reasons for this: a strong lending growth, banks’ focus on low-cost current accounts and moderate provisioning needs.

Published in Dawn, The Business and Finance Weekly, March 5th, 2018