by yousuf nazar
PAKISTAN’S economic outlook for the next year or two is serious even if it manages to get the planned three billion dollars in external financial assistance in the next few months.
Its currency has lost 10 per cent against the US dollar since the beginning of the year, trade deficit has jumped by 50 per cent this year, Standard & Poor’s has cut its rating by a single notch to a B with a negative outlook on May 15, and its Euro bonds are being quoted at a spread of 500-600 basis points to the US treasuries compared to an average spread of 261 points for emerging markets bonds.
It is not unlikely that key macro indicators will deteriorate as follows:
— The GDP growth may drop sharply to three per cent or less from 6.6 per cent in 2007. This would imply a drop in the real per capita income of around 80 per cent of Pakistanis due to an approximate population growth rate of 2.4 per cent and skewed income distribution.
— The current account deficit could exceed 10 per cent of the GDP for the current fiscal year ending June 30, 2008.
— The rupee could depreciate to 75 per dollar with a fair chance of overshooting it in the interim if the trade gap continues to widen and capital flight accelerates.
— Inflation could accelerate to 25 per cent sparking widespread social unrest and pushing more people below the poverty line.
— The stock market could fall to the 11,000 level i.e. by another 15 per cent.
— The budget deficit could cross eight per cent of the GDP.
— Foreign exchange reserves may drop to under two months of import cover.
Why is Pakistan especially vulnerable?
Based on the latest available key economic indicators of the 25 largest developing countries (excluding the Middle Eastern oil producers) in Asia, Latin America and Africa, Pakistan has had the worst fiscal and current account deficit level (measured as a percentage of GDP), the second highest inflation rate and the second worst performing currency when measured in terms of its depreciation against the US dollar since the beginning of the year. Oil prices are not the only reason for Pakistan’s current economic woes. The rapid deterioration of its macro economic indicators has exposed its fragility and the myth of its ‘economic progress’.
Among all major developing countries, Pakistan’s economy is the weakest and most vulnerable to rising oil prices and international financial crisis. Fourteen of the 25 largest emerging market economy countries do not have a deficit at all because their exports and other earnings are more than their imports; 10 countries have an inflation rate of six per cent or less and only four countries, Venezuela, Russia, Pakistan and South Africa, have double-digit inflation. Overall, Pakistan has one of the worst levels of external deficit and inflation at 8.5 per cent of the GDP and 17 per cent respectively.
Political leaders have been devoting most of their time and energy to the judges’ issue. It would serve the country better if the ruling PPP can move quickly to resolve the judiciary issue because if it does not, it may not have the political strength to deal with an economic tsunami that is waiting to happen and could be the biggest reason why the government may not complete its term. The Pakistani establishment knows this and is watching gleefully as the coalition falls apart amid a growing trust deficit between the PPP and Nawaz Sharif’s PML-N.
So far, Mr Asif Ali Zardari has ruled out any possibility of impeaching President Pervez Musharraf, although he said that he did not recognise him as a constitutional president. “I spent five years in his prison … but can we afford it? … can our economy afford it?” he asked an interviewer recently. Is that the only reason or is it because the United States sees him as its man who can deliver on the war on terror?
But Musharraf is also the biggest destabilising factor for the PPP government as well as for the market and investors. Mr Zardari’s desire to maintain a good working relationship with the army and the United States is understandable but Musharraf may be past his expiry date to perform that function as the Bush presidency nears the end of its term. The initiative has slipped out of the PPP’s hands.
If the party does not seize it now it may get trapped in a 1988-like situation when Benazir Bhutto became Pakistan’s prime minister with no real powers and had little control over the biggest province Punjab but was blamed for all its problems. One way out of this impasse may be to convene a joint sitting of the parliament and move a resolution asking President Musharraf to resign. It will be hard for Musharraf to ignore such a public call by elected representatives.
If the economy continues its present slide, even the US may not be able to bail Pakistan out. Its own once mighty financial giants are being rescued by Chinese and Arab investors. Pakistan’s last resort would be the IMF with its usual conditionalities and the inevitable pain they would cause. For Pakistan, the most sensible course would be to put its house in order now, introduce fiscal reforms, mobilise domestic savings, and have special schemes to attract capital from overseas Pakistanis. But this will require tremendous political will backed by broad national consensus.
Pakistan may need as much as $10bn a year in economic aid if oil prices stay at the level of $125 a barrel or may require more if they move to the $150-$200 range which is not unlikely. The Financial Times commented in an editorial this month: “For rich countries, the $125 oil price will be a noticeable drag on economic growth; for poor countries, when combined with higher food prices, it will mean more poverty. Oil supply should grow in response but if it does not, $200 oil is just about conceivable. It would cause serious economic disruption, international tensions and currency crises for some poor nations.”
The unpleasant truth is that Pakistan is among the most vulnerable developing poor nations.
The writer is the author of The Gathering Storm. Pakistan: Political Economy of a Security State and a former emerging markets investments head of Citigroup.