Pakistan experienced net outflows of 398 million dollars indicating that inflows including foreign exchange earnings from exports of goods and services, borrowings from bilaterals/multilaterals/commercial banks and workers’ remittances combined were less than the outflows, including imports and repayment of debt particularly for repayment of a maturing one billion dollar sukuk. This contrasts with the inflows of 1.955 billion dollars in April 2018. However in July-April 2018, in comparison to the same period this year shows comparable inflows – 11.350 billion dollars last year and 11.322 billion dollars in the current year. A rise in remittances – from 16.48 billion dollars in July-April 2018 compared to 17.8 billion dollars in the comparable period this year – staved off higher outflows than were experienced last year. “Net Outflow”
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Ishaq Dar’s management of the finance ministry is largely the reason why the country suffers from massive debt denominated in dollars. His rationale was that as interest rates were lower internationally than in Pakistan, by shifting reliance on domestic debt to foreign debt with the objective of meeting the government’s expenditure requirements, he was reducing the country’s annual budgetary allocations on debt servicing and repayment as and when due. Economists had warned him that the rupee on average depreciates by around 4 to 5 percent each year therefore the gains made today may well be lost tomorrow. Dar then proceeded to artificially control the rupee value through market intervention and thereby controlled the budgetary allocations on external debt and servicing; however this patently flawed policy not only made our exports uncompetitive in the international market and imports highly attractive but also depleted our foreign exchange reserves that Dar then supported through another flawed policy notably borrowing to shore up the reserves. In other words, external debts continued to rise. Additionally, he issued Eurobonds and Sukuk which he proudly proclaimed as indicative of Pakistan’s entry into the equity market. And these bonds were issued at rates higher than the then prevalent international market rates. And once the International Monetary Fund (IMF) programme was completed around October 2016 all sources of external borrowing dried up and Dar began to offer high rates of return on Eurobonds/sukuk and borrowed heavily from the commercial banks at rates well above the market. “Net Outflow”
Thus the Pakistan Tehrik-i-Insaaf government is correct in accusing the previous administration of piling up external loans. Be that as it may, it had no option but to also borrow heavily to try to meet the current account deficit of 19 billion dollars and this was the reason why the Prime Minister borrowed heavily from friendly countries – 3 billion dollars each from Saudi Arabia and the United Arab Emirates (though the UAE has so far disbursed 2 billion dollars) and 2.2 billion dollars from China (with the previous administration having borrowed 2 billion dollars for the current year from China).
In the third week of October, on Prime Minister Khan’s second visit to the Kingdom since taking oath, he was assured of a one year 3 billion dollar loan for balance of payment support (which has been received). At the same time, the Saudis committed up to 3.2 billion dollars of oil at deferred payment facility for one year, an arrangement that would be reviewed after three years. This, Advisor to the Prime Minister on Finance, tweeted: “From 1st July 2019 KSA is activating the deferred payment for petroleum products facility of US$ 275mn per month amounting to US$3.2 billion per year for 3 years. This will strengthen Pakistan’s Balance of Payments position.” Indeed it will, however it will be his responsibility to ensure that the balance of payment issues do not recur and formulate policies to minimize Pakistan’s trade imbalance in goods and services. At the same time, there is a need to proactively engage in negotiating exclusive partnerships with countries that import labour as last year foreign remittances were buffering Pakistan reserves, and of other labour exporting countries, and are on track to become the largest source of external financing as per the World Bank.
(This news/article originally appeared in Business Recorder on May 24th, 2019)