Another tough year for Pakistan’s economy

Pakistan’s main economic storyline in 2019 was austerity. Islamabad implemented belt-tightening measures to ease a balance of payments crisis that hit a peak in October 2018, when Prime Minister Imran Khan, just several months into his term, admitted his country was ‘desperate’ for loans.

Pakistan enjoyed some economic relief in 2019, but many challenges — particularly how to implement lasting measures to end a crippling cycle of debt — remain entrenched and will carry into 2020.

Pakistan’s austerity measures included cutting development expenditures and increasing petroleum prices and electricity tariffs. The government’s new budget, released in June, laid out additional steps to boost revenue ranging from increasing the sales tax on sugar to cutting the salaries of government ministers. These measures were necessary to address the country’s debt problems, but also to convince the International Monetary Fund — which approved a fresh bailout package in 2019 — that Islamabad is serious about cutting costs.

There were some good news stories in 2019. New financial packages from China, Saudi Arabia and the United Arab Emirates eased the strain on Pakistan’s foreign reserves. They increased from US$7.6 to US$9.4 billion between January and September. Foreign investment surged overall, particularly with short-term bond acquisitions.

Foreign direct investment increased by 200 percent over the first half of 2019 — a trend attributable to a devalued Pakistani rupee, which gave foreign investors higher returns on local currency bonds. Balance of payments problems, while still sizable, did ease. This prompted credit rating agency Moody’s to give Islamabad an end-of-year gift — a raising of Pakistan’s economic outlook from negative to stable.

But the news was otherwise gloomy. Economic growth slowed to 3.3 percent in fiscal year 2019 — a 2.2 percent drop from the previous year. The fiscal deficit increased from 6.4 to nearly 9 percent over the same period. Inflation soared to a five-year high. Public sector debt increased too.

Unfortunately, beyond austerity measures and new bailout packages from bilateral partners and the IMF, Islamabad gave little indication in 2019 that it had a long-term strategy to tackle its economic woes.

It offered little more than rhetoric — such as promises to recover wealth plundered overseas and calls for the Pakistani diaspora to open its wallet. Islamabad did step up a campaign to promote more foreign tourism — a wise move, given Pakistan’s improved security situation but one that will be hard to pull off given the country’s image problems abroad.

Additionally, questions arose about Islamabad’s ability to fix the economy. The ruling Pakistan Tehreek-e-Insaf party had never run a national government until it took office in 2018. Finance Minister Asad Umar, a former energy executive, resigned in April following sharp public criticism of Islamabad’s slow response to the economic crisis. Abdul Hafeez Shaikh, an economist who was finance minister from 2010 to 2013, replaced Umar. But Shaikh was appointed not as finance minister but as Khan’s advisor on finance.

Tellingly, Pakistan’s powerful military increased its role in economic policy in 2019. In June, Army Chief Qamar Javed Bajwa was appointed to the National Development Council, a new committee responsible for major economic decisions. Bajwa’s deepening footprint in Pakistani economic policymaking may have reflected the military’s doubts about the civilian leadership’s ability to right the economic ship.

Pakistan’s year-long economic struggles exposed Islamabad’s political vulnerability. Austerity plans are risky for a ruling party swept into power on a strong populist plank, and led by a premier who had promised to establish an Islamic welfare state. Predictably, the political opposition was ready to pounce. For several weeks in November, thousands of protestors led by Fazlur Rehman, a wily veteran politician, converged on Islamabad to lambast the government’s mishandling of the economy.

In 2020, Islamabad’s economic challenges will be compounded by several factors. One is its failing state-owned enterprises. The domestic debt of these companies — which include Pakistan’s national airline and railway — increased by nearly 250 percent between 2013 and 2018, and in 2019 they continued to borrow heavily. Their struggles are a big reason why Pakistan’s public debt stood at a whopping 86.5 percent of GDP in mid-2019. Political risks — such as potential job losses — kept Islamabad from pursuing privatization.

Additionally, in 2020 Pakistan will be implementing the second phase of the China–Pakistan Economic Corridor (CPEC). Islamabad will have to carefully manage the expansion of CPEC — a critical infrastructure project but also a serious debt risk.

An early milestone in 2020 will come in February when the Financial Action Task Force (FATF) — a global watchdog that monitors terrorist financing — decides whether Pakistan has adequately cracked down against Islamist militants and their financing networks. If the answer is no, Islamabad could be sanctioned by FATF, which would risk driving away foreign investors and banks.

For an already-overwhelmed government, this would make the task of easing Pakistan’s economic crisis — one that shows few signs of ending — all the more daunting.

24 Dec 19/Tuesday                            Source: EASTASIAFORUM