Haq's Musings

Riaz Haq writes this data-driven blog to provide information, express his opinions and make comments on many topics. Subjects include personal activities, education, South Asia, South Asian community, regional and international affairs and US politics to financial markets. For investors interested in South Asia, Riaz has another blog called South Asia Investor at http://www.southasiainvestor.com and a YouTube video channel https://www.youtube.com/channel/UCkrIDyFbC9N9evXYb9cA_gQ

Showing posts sorted by relevance for query twin deficits. Sort by date Show all posts

Sunday, December 29, 2019

Pakistan's Year 2019 in Review: Economic and Security Challenges

Pakistan started the year 2019 in the midst of a very serious economic crisis with very high twin deficits and extremely low foreign exchange reserves. While Pakistan's internal security challenges subsided, the external security concerns grew with India's attack on Balakot in 2019. Tough actions by PTI government have started to pay off at the end of year 2019. Toward the end of the year, Pakistan's twin deficits declined substantially and credit rating agency Moody's upgraded Pakistan's outlook from negative to stable. Mass migration continued both within and outside Pakistan. About 600,000 Pakistanis went to work overseas in 2019. And at least 4 times more Pakistanis moved from rural to urban areas. Pakistan had high profile visits of the royal families from the UK and the Netherlands as well as the visit of the Sri Lankan cricket team, the first foreign team to play test series in Pakistan in a decade. Conde Nast Travel picked Pakistan as the top tourism destination for 2020. Regional security situation worsened with Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

Economic Crisis:

The year 2019 began with Pakistan battling massive twin deficits, deteriorating foreign currency reserves, low exports, diminishing tax revenues, a weak currency, unsustainable external debt payments, and soaring sovereign debt. This crisis has forced the country to seek IMF (International Monetary Fund) bailout, the 13th such request in Pakistan's 72 year history.

Tough actions by PTI government have started to pay off at the end of year 2019. In October 2019, Pakistan saw a monthly trade surplus of $99 million, its first in decades. Pakistan's exports in November 2019 jumped 9.6% to $2.02 billion while imports dropped 17.53% to $3.815 billion over corresponding month of last year, the Ministry of Commerce data showed.

Pakistan Trade Data 2019

In December 2019, IMF's Pakistan representative Maria Teresa Daban Sanchez said as follows: “Pakistan has put behind its difficult years of security. Now, it is time for the business community and society in general to enjoy this new time and to really unleash the potential of Pakistan.”

Moody's credit rating agency upgraded Pakistan's outlook from negative to stable as the year 2019 came to a close.

Security Challenge:

While newly elected PTI government was still dealing with the economy, the Indian Air Force entered Pakistani airspace and dropped bombs in Balakot on the orders of India's far-right Prime Minister Narendra Modi. The Indian action drew strong Pakistani response with Pakistan Air Force crossing the Line of Control in Kashmir and shooting down two Indian fighter jets. Pakistan also captured an Indian fighter pilot shot down down in Azad Kashmir. It was Pakistani Prime Minister Imran Khan's deft handling of the regional crisis that prevented further escalation into a full-blown India-Pakistan war that could have gone nuclear. The year 2019 ended with Pakistani economy stabilizing and Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

The Indian action drew strong Pakistani response with Pakistan Air Force crossing the Line of Control in Kashmir and shooting down two Indian fighter jets. Pakistan also captured an Indian fighter pilot shot down down in Azad Kashmir. It was Pakistani Prime Minister Imran Khan's deft handling of the regional crisis that prevented further escalation into a full-blown India-Pakistan war that could have gone nuclear. The year 2019 ended with Pakistani economy stabilizing and Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

Source: South Asia Terrorism Portal

Pakistan saw lowest terror related fatalities in a decade with 228 deaths in the first half of 2019. This is a huge improvement from 2009 when Pakistan had nearly 12,000 deaths in terrorism related incidents.

Source: Conde Nast Traveller

Improved security helped Pakistan earn number one spot among top tourism destinations picked by Conde Nast Travel magazine. Pakistan hosted Prince William and his wife Kate Middleton as well as Queen Maxima of the Netherlands among other top foreign dignitaries. In December, Pakistan had its first cricket test series at home in a decade with the visit of the Sri Lankan cricket team.

International Relations:

Pakistan's relations with India sank to a new low when Prime Minister Narendra Modi ordered bombing of Balakot in February 2019 and Pakistan responded by crossing the Line of Control and shooting down two Indian fighter jets in Kashmir and capturing an Indian pilot. It was Pakistani Prime Minister Imran Khan's deft handling of the regional crisis that prevented further escalation into a full-blown India-Pakistan war that could have gone nuclear. The year 2019 ended with Pakistani economy stabilizing and Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

Prime Minister Imran Khan's visit to the White House and meeting with President Trump helped warm up ties with the United States. Speaking with the media in a joint press conference with Prime Minister Imran Khan in the Oval Office, President Trump said: "It's my honor to have the very popular and great athlete, the Prime Minister of Pakistan at White House". The President added that Pakistan was helping the US to "extricate" US troops from Afghanistan, through political negotiations.

Prime Minister Imran Khan's rally drew nearly 30,000 Pakistani-Americans to Capital One Arena on Sunday, July 21, 2019. It was the largest ever public gathering of any diaspora to welcome a foreign visiting leader in the United States until the more recent Howdy Modi rally in Houston that drew nearly 60,000 people. Earlier record of 18,000 was set by Indian Prime Minister Narendra Modi's rally at New York City's Madison Square Garden in 2014.

China, Saudi Arabia and United Arab Emirates maintained close ties with Pakistan and offered valuable assistance to Islamabad to deal with its economic difficulties. United States and the European Union (EU) nations also supported IMF's bailout of Pakistan.

Massive Migration:

Nearly 600,000 Pakistanis went overseas for work in the first 11 months of 2019, according to figures recently released by Pakistan Bureau of Emigration and Overseas Employment. This phenomenon helped contain unemployment in a country where about 2 million young people are entering the job market each year. It has also helped remittances soar nearly 21X to nearly $21 billion since the year 2000.

Emigrants From Pakistan 1990-2019. Source: Pakistan Bureau of Emigration

Pakistan is in the midst massive migration, both internal and external. Over half a million Pakistanis are migrating overseas while about 2 million are migrating internally from rural to urban areas. These trends are transforming the nation. Overseas remittances are soaring. Pakistan is becoming more urban. The country is also seeing growing foreign cultural influences from both the West and the Middle East.

Summary:

Pakistan faced serious economic and security challenges in 2019. While Pakistan's internal security challenges subsided, the external security concerns grew with India's attack on Balakot in 2019. Tough actions by PTI government have started to pay off at the end of year 2019. Toward the end of the year, Pakistan's twin deficits declined substantially and credit rating agency Moody's upgraded Pakistan's outlook from negative to stable. Mass migration continued both within and outside Pakistan. About 600,000 Pakistanis went to work overseas in 2019. And at least 4 times more Pakistanis moved from rural to urban areas. Pakistan had high profile visits of the royal families from the UK and the Netherlands as well as the visit of the Sri Lankan cricket team, the first foreign team to play test series in Pakistan in a decade. Conde Nast Travel picked Pakistan as the top tourism destination for 2020. Regional security situation worsened with Indian and Kashmiri Muslims facing the threat of genocide at the hands of newly re-elected Indian government of Hindu fanatic Prime Minister Narendra Modi.

Related Links:

Haq's Musings

South Asia Investor Review

Pakistan's Debt Crisis

India's Attack on Balakot and Pakistan's Response

Internal and External Mass Migration in Pakistan

Retired Justice Katju: Dark Clouds Over India

Pakistan Tourism Boom

Digital BRI: China and Pakistan Building Fiber, 5G Networks

LNG Imports in Pakistan

Growing Water Scarcity in Pakistan

China-Pakistan Economic Corridor

Ownership of Appliances and Vehicles in Pakistan

CPEC Transforming Pakistan

Pakistan's $20 Billion Tourism Industry Boom

Riaz Haq's YouTube Channel

PakAlumni Social Network

Sunday, July 10, 2022

India's Forex Reserves Fall As Foreign Investors Head For The Exits

India's foreign exchange reserves are falling rapidly as foreign investors flee and the country's trade and current account deficits widen. More than $267 billion worth of India's external debt of the total $621 billion is due for repayment in the next nine months. This repayment is equivalent to about 44% of India's foreign exchange reserves. This combination of investors' exodus, widening twin deficits and short-term debt repayments has caused the Indian rupee to hit new lows. Unlike China and other nations that have accumulated large reserves by running trade surpluses, India runs perennial trade and current account deficits. The top contributor to India's forex reserves is debt which accounts for 48%. Portfolio equity investments known as “hot” money or speculative money flows account for 23% of India's forex reserves, according to an analysis published by The Hindu BusinessLine.

India's Declining Forex Reserves. Source: Business Standard

Investor Exodus:

Foreign portfolio investors have pulled out a whopping $33.5 billion from equity and $2.1 billion from debt segments of Indian financial markets, for a total net outflow of $35.6 billion from October 2021 to June 2022, according to data compiled by the National Securities Depository Limited. In the first half of this calendar year, the total net outflows were $29.7 billion.

It's not just the FPIs leaving India; a number of multinational companies are also pulling foreign direct investment (FDI) from India. Several big names including German retailer Metro AG, Swiss building-materials firm Holcim, US automaker Ford, UK banking major Royal Bank of Scotland, US motorcycle manufacturer Harley-Davidson and US banking behemoth Citibank have chosen to pull the plug on their operations in India or downsize their presence in recent years.

Widening Deficits:

India's finance ministry has warned of a growing twin deficit problem, with higher commodity prices and rising subsidy burden leading to an increase in both the fiscal and current account deficits. India's June trade deficit widened to a record high of $25.63 billion, mainly due to a rise in crude oil and coal imports, from $9.61 billion a year earlier. India's April-May fiscal deficit was $25.8 billion.

Summary:

India's current level of forex reserves is enough for less than 10 months of imports projected for 2022-23. But the country has had a structural current account deficit which has been funded by large capital inflows. The accumulation of forex reserves has been due to surplus in the capital account. Since late February, the foreign exchange reserves have declined by $36 billion. India still has large forex reserves but its economy is in the same boat as other emerging markets that run large and worsening trade and current account deficits. With declining forex reserves, India is likely to face headwinds as the US Federal Reserves raises interest rates to fight inflation.

Saturday, April 13, 2019

Current Debt Crisis Threatens Pakistan's Future

Pakistan is battling massive twin deficits, deteriorating foreign currency reserves, low exports, diminishing tax revenues, a weak currency, unsustainable external debt payments, and soaring sovereign debt. This crisis has forced the country to seek IMF (International Monetary Fund) bailout, the 13th such request in Pakistan's 72 year history.

Pakistan Debt Service: Source SBP

Pakistan's debt repayment costs rose to $5.4 billion for first half of fiscal 2019 ( July 2018-Dec 2018), up from $7.5 billion for the entire fiscal 2018 (July 2017-June 2018), according to the State Bank of Pakistan. At this rate, the total debt service cost for current fiscal 2019 will exceed $11 billion, adding to the nation's debt crisis.

Pakistan's External Debt. Source: Wall Street Journal

This $11 billion debt service cost will add to the projected trade deficit of nearly $40 billion for the current fiscal year. How can Pakistan fund this balance of payments deficit of about $50 billion? Remittances of $21 billion in current FY2019 from Pakistani diaspora are expected to reduce it to $30 billion. PTI government has taken on billions of dollars in loans from Gulf Arabs and China. Given the low rates of foreign investments in the country, a big chunk of the remaining deficit will have to be met by borrowing even more funds which will further increase future debt service costs.

Pakistan's Current Account Deficit. Source: Trading Economics

As a result, Pakistan is now battling massive twin deficits, deteriorating foreign currency reserves, low exports, diminishing tax revenues, a weak currency, onerous external debt payments, and soaring sovereign debt. This crises has forced the country to seek IMF (International Monetary Fund) bailout, the 13th such request in Pakistan's 72 year history.

Pakistan Debt as Percentage of GDP. Source: Trading Economics

In the short term, PTI government's efforts are beginning to pay off. The current account deficit (CAD) in first 8 months of FY2019 (July-Feb 2018) declined to $8.844 billion, down 22.5%, from $11.421 billion in same period last year, according to SBP as reported by Dawn newspaper.

Pakistan's Debt Burden Highest Among 25 Emerging Nations

However, Pakistan's economic woes are far from over. The country's twin deficits are structural. Its exports and tax collections as percentage of its GDP are among the lowest in the world. British civil society organization Jubilee Debt Campaign conducted research in 2017 that showed that Pakistan has received IMF loans in 30 of the last 42 years, making this one of the most sustained periods of lending to any country.

History of Pakistan's IMF Bailouts

Pakistan needs to find a way to build up and manage significant dollar reserves to avoid recurring IMF bailouts. The best way to do it is to focus on increasing the country's exports that have remained essentially flat in absolute dollars and declined as percentage of GDP over the last 5 years. Pakistan's economic attaches posted at the nation's embassies need to focus on all export opportunities in international markets and help educate Pakistani businesses on the best way to take advantage of them. This needs to be concerted effort involving various government ministries and departments working closely with industry groups. At the same time, the new government needs to crack down on illicit outflow of dollars from the country.

Pakistan Debt Service as Percentage (45%) of Budget Among World's Highest

Azad Labon Ke Sath host Faraz Darvesh discusses Imran Khan's challenges with Misbah Azam and Riaz Haq (www.riazhaq.com)

https://youtu.be/CQ41Qt_2XQM

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Pakistan is the 3rd Fastest Growing Trillion Dollar Economy

CPEC Financing: Is China Ripping Off Pakistan?

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Riaz Haq's YouTube Channel

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Tuesday, December 28, 2010

Indian Economy: Hard or Soft Landing in 2011?

Pakistan's economy had a hard landing in 2008. It was triggered by a balance of payments crisis brought about through precipitous decline in foreign capital inflows combined with policy inaction in response to major external shocks in terms of food and fuel prices during political transition. Is the Indian economy similarly vulnerable in 2011? Is it headed for significant slowdown in the next twelve months? And if it is, can the Indian leadership manage a soft landing through major policy actions now?

To answer these questions, let us examine the following facts:

1. India's current account deficit widened sharply to $13.7 billion in the June-quarter, which was around 3.7 per cent of GDP. The deficit was $4.5 billion in the same period year ago.

2. India's FDI has declined by a third from $34.6 billion in 2009 to $23.7 billion in 2010. Its current account deficit is being increasingly funded by short-term capital inflows (FII up 66% from $17.4 billion in 2009 to $29 billion in 2010) rather than more durable foreign direct investment (FDI), posing a risk to external balance and funding of gap, according to a recent warning by Goldman Sachs. "Nearly 80 per cent of the capital inflows are non- FDI related. Given the excess spare capacity globally, FDI may remain weak going forward," the Goldman note said.

3. Inflation in India is running at a double digit pace as is credit expansion. India's primary articles price index was up 15.35 percent in the latest week compared with an annual rise of 13.25 percent a week earlier, data on Thursday showed. Year-over-year credit growth was 23 per cent till December 3, while deposit growth was only 15 per cent, as compared to RBI's projection of 20 per cent and 18 per cent, respectively, for 2010-11.

4. India's Food and fuel prices are continuing to rise by double digits. The food price index rose more than 12 percent, with the price of onions -- the country's most widely-eaten vegetable -- of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week.

5. The oil prices are likely to spike as the American and European economies recover in 2011, prompting Indian commerce secretary Rahul Kullar to acknowledge that “I am not sanguine. One blip on crude prices and my import bill suddenly zooms. On pro-rata basis we are looking at $ 120 billion with a caveat that if oil prices go up, it could be $ 130-135 billion”. Crude oil prices are currently running at $ 87-88 per barrel.

While China's situation is better because it enjoys significant current account surpluses and has strong capital flow controls, it is also seeing its economy overheat along with India's economy. Joseph Stiglitz, a Nobel Laureate Columbia University economist, has argued that India is more vulnerable to an asset bubble than China, saying that “strong economies that don’t yet have capital control become the focal point” for the liquidity injected by the US Federal Reserve. Stiglitz thinks that India, more than China or Brazil, should watch out for the tidal wave of money made available from the Fed’s quantitative easing. Mike Shedlock, an American investment advisor, believes that "India and China are going to overheat and crash, or their economic growth is going to slow dramatically, quite possibly both".

Indian President Pratibha Patil said last week that she is confident the economy will grow at about 9 percent in the current fiscal year ending March 2011 and would be on a sustained growth path of about 9 to 10 percent in FY12, according to Reuters. It is quite surprising that the Indian government continues to talk about increasing levels of economic growth in 2010-2011 and beyond amidst growing inflation and rising imbalances in the Indian economy. What they should be thinking about now is how to manage a soft landing by reducing liquidity and cutting India's twin deficits, rather than stepping on the accelerator and risk a big economic crash with long term negative consequences.

Related Links:

Haq's Musings

China's Trade and Investment in South Asia

India's Twin Deficits

Pakistan's Economy 2008-2010

Inflation Hits India

Goldman Sachs India Warning on Twin Deficits

India's Nov 2010 Imports, Exports

Sunday, February 27, 2011

Economic Impact of Arab Revolt on South Asia

Much is being written about the potential for the spread of political upheaval that started in Tunisia and recently led to the end of the 30 years rule of the Egyptian dictator Hosni Mubarak. Most of the commentary and punditry has so far been focused on potential political instability forced by possibly massive street protests.

Political fall-out from the events in Tunisia and Egypt has already engulfed the Middle Eastern nations of Bahrain, Libya and Yemen. However, little attention has so far been paid to the more immediate impact of spreading trouble in the oil-rich Middle East on developing nations in South Asia and elsewhere.

Crude oil prices have been rising for some time but the fears of the spread of the political unrest have accelerated the rate of increase. The price of crude has already crossed the crucial $100 a barrel mark with the Libyan crisis in full bloom. South Asian economies are keeping a close eye on the situation in Africa and Middle East but still remain unaffected in receiving their oil supplies through this region. Any further spread of the unrest into GCC countries, particularly Saudi Arabia, could have a huge impact on the health of South Asian economies.

According to the World Bank's Immigration and Remittances Factbook 2011, the top remittance sending countries in 2009 were the United States, Saudi Arabia, Switzerland, Russia and Germany. Worldwide, the top recipient countries in 2010 were India, China, Mexico, Philippines and France, according to Dawn News. In South Asia, the top five remittance receiving nations in 2010 were: India ($55.0 billion), Bangladesh ($11.1 billion), Pakistan ($9.4 billion), Sri Lanka ($3.6 billion), and Nepal ($3.5 billion).

Pakistan's exports to the Middle East add up to several billion dollars a year. The United Arab Emirates alone imported $1.7 billion worth of Pakistani products last year, according to Arabian Business.

Relatively stable energy prices and rising exports and surging remittances have helped South Asian nations in 2009-2010. But this could all unravel with rising oil import bill combined with the fall of inflows from worker remittances and decline in exports to the Middle East region. India and Pakistan are already running significant current account deficits, and experiencing high rates of inflation exacerbated by rising food and energy prices since late 2010. The economic hardship, particularly high food prices and unemployment, could become a catalyst for serious political turmoil in South Asia in 2011 and beyond.

Related Links:

Haq's Musings

Pakistan's Economy 2008-2010

Pakistan's Rising Exports and Remittances

Indian Economy: Hard or Soft Landing in 2011?

China's Trade and Investment in South Asia

India's Twin Deficits

Inflation Hits India

Goldman Sachs India Warning on Twin Deficits

India's Nov 2010 Imports, Exports

Friday, December 31, 2010

Pakistan Shares Exceed BRIC Gains in 2010

Pakistan's main stock market ended 2010 with a 28 percent annual gain, driven by foreign buying mainly in the energy sector, despite concerns about the country's macroeconomic indicators after summer floods, according to Reuters. Although it was less than half of the 63% gain recorded in 2009, it is still an impressive rise in KSE-100 index when compared favorably with the performance of Mumbai(+17%) and Shanghai(-14.3%) key indexes. Among other BRICs, Brazil is up just 1% for the year, and the dollar-traded Russian RTS index rose 22% in the year, reaching a 16-month closing high of 1,769.57 on Tuesday, while the rouble-based MICEX is also up 22%.

Pakistan's key share index KSE-100 was just over 1000 points at the end of 1999, and it closed at 12022.46 on Dec 31, 2010, significantly outperforming BRIC markets for the decade. Pakistan rupee remained quite stable at 60 rupees to a US dollar until 2008, slipping only recently to a range of 80-85 rupees to a dollar. In spite of the currency decline, Pakistan's KSE-100 stock index surged 55% in 2009 in US dollar terms and 65% in rupee terms. During the same period of 1999-2009, Mumbai Sensex index moved from just over 5000 points to close at 17,464.81.

If you had invested $100 in KSE-100 stocks on Dec. 31, 1999, you'd have over $1000 today, while $100 invested in Mumbai's Sensex stocks would be worth about $400. Investment of $100 in emerging-market stocks in general on Dec. 31, 1999 would get you about $300 today, while $100 invested in the S&P500 would be essentially flat at $100 today.

The US Federal Reserve's current easy money policy, euphemistically called "quantitative easing", sent a torrent of US dollars flooding into the US, European and emerging markets around the world. All three major US stock indices rose in 2010. The Dow was up 1,149.46, or 11 percent. The S&P gained 142.54, or 12.8 percent. The Nasdaq ended higher by 383.72, or 16.9 percent.

Some of the US stimulus money found its way into India and Pakistan as well. The 28% gain in KSE-100 is driven in part by net foreign capital inflows of Rs. 43 billion ($515 million US dollars) in 2010. Similarly, global funds bought a net 6.05 billion rupees ($135 million) of Indian equities on Dec. 29, taking this year’s record flows into equities to 1.31 trillion rupees ($27 billion US dollars), according to data on the Securities and Exchange Board of India website. India's FII inflows surged 61 percent in 2010, making the gauge the most expensive in Asia and among the BRIC markets.

While China's situation is superior among the emerging markets, including BRICs, because it enjoys significant current account surpluses and has strong capital flow controls, it is also seeing its economy overheat along with India's economy. Joseph Stiglitz, a Nobel Laureate Columbia University economist, has argued that India is more vulnerable to an asset bubble than China, saying that “strong economies that don’t yet have capital control become the focal point” for the liquidity injected by the US Federal Reserve. Stiglitz thinks that India, more than China or Brazil, should watch out for the tidal wave of money made available from the Fed’s quantitative easing. Mike Shedlock, an American investment advisor, believes that "India and China are going to overheat and crash, or their economic growth is going to slow dramatically, quite possibly both".

Although the hot money does help to partially fund the growing current account deficits in both India and Pakistan, the net inflow of $515 million of FII in Pakistan is relatively small at 0.3% of its GDP, and it is less likely to impact the economy even if all of it goes away in 2011. In India's case, however, the $27 billion in FII represents a little over 2% of its GDP and its sudden flight out of India is a substantial risk for Indian economy.

In my opinion, the uncertain US and European economic recoveries and future monetary policy of the US Federal Reserve in 2011 and beyond represent the greatest source of instability for capital markets in the emerging nations such as India and Pakistan, which impose relatively lax controls on short-term capital flows.

Related Links:

Haq's Musings

Trade and Economy Indicators of 231 Countries

JS Global on Pakistani Stocks in 2010

Indian Economy's Hard Landing in 2011?

High Cost of Failure to Aid Flood Victims

Karachi Tops Mumbai in Stock Performance

India and Pakistan Contrasted in 2010

Pakistan's Decade 1999-2009

Musharraf's Economic Legacy

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Pakistan's Economy 2008-2010

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Goldman Sachs India Warning on Twin Deficits

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Friday, May 11, 2018

Nawaz Sharif's Report Card 2013-18

The last five years of Pakistan's outgoing government of the Pakistan Muslim League (Nawaz) have seen the revival of Pakistan's economy and completion of many long delayed infrastructure and energy projects. Mr. Nawaz Sharif deserves full credit for it. At the same time, the PML government is responsible for slow progress on human development indicators, major decline in exports, growing twin deficits of budget and external accounts, mounting public debt and lack of transparency in financial matters. It is the lack of transparency that has been brought in sharp focus with the removal of Prime Minister Nawaz Sharif by the nation's Supreme Court in the aftermath of Panama Papers. The leak of these papers revealed his family's ownership of undeclared and unexplained substantial assets abroad.

Terrorism Toll in Pakistan. Source: SATP.org

Highlights:

Pakistan achieved 5.8% growth in gross domestic product (GDP) in fiscal 2017-18, the highest in the last 13 years. Many long delayed projects ranging from roads, ports, dams and irrigation projects to power plants were finally completed. Examples of such long delayed projects include M8 and M9 motorways, Lyari Expressway, New Islamabad Airport, Neelum-Jhelum Hydroelectric Project and Kachhi Canal. The PMLN government's performance was boosted by a number of factors including the following:

1. Pakistan Army's anti-terror operations Zarb e Azb and Radd ul Fasad dramatically reduced the level of violence and significantly improved security in the country. It resulted in increased confidence of businesses, investors and consumers in the economy.

2. Growth of Chinese investment in China Pakistan Economic Corridor (CPEC) related infrastructure and energy projects. Ongoing execution of CPEC projects is transforming some of the least developed areas of Pakistan and creating hundreds of thousands of new jobs.

3. Major decline in energy prices, particularly prices of liquified natural gas (LNG), helped boost the energy and the power sector which in turn helped increase industrial production and transport sectors. Pakistan is now among the world's fastest growing LNG markets.

Lowlights:

Structural problems in Pakistan's economy remained unaddressed. Current account deficits widened as exports declined and imports jumped, putting pressure on the nation's foreign exchange reserves. Increased deficit spending resulted in bigger budget deficit and heavy borrowing. Public debt and debt service costs climbed. School enrollment and literacy rates remained essentially flat in the last 5 years and Pakistan continued to rank low on human development indices. Here are some of the details:

1. Pakistan's exports have plummeted from about $25 billion in 2013-14 to about $20 billion in 2016-17 under PMLN government. Exports in first 9 months of current fiscal year 2017-18 have been recorded at $17 billion. The trade deficit for the first nine months of fiscal 2017-18 reached $27.3 billion. This situation has forced the government to borrow more in international debt markets at commercial rates. The country now faces the prospect of going back to the International Monetary Fund (IMF) for yet another bailout.

Pakistan's External Debt. Source: Wall Street Journal

2. Pakistan's net primary enrollment is stuck at about 57% while the literacy rate is flat at about 60%. This is in spite of fact that the country now spends almost as much on education as on defense. Pakistan's public spending on education has more than doubled since 2010 to reach $8.6 billion a year in 2017, rivaling defense spending of $8.7 billion. Private spending on education by parents is even higher than the public spending with the total adding up to nearly 6% of GDP. Pakistan has 1.7 million teachers, nearly three times the number of soldiers currently serving in the country's armed forces. Unfortunately, the education outcomes do not yet reflect the big increases in spending. Why is it? Let's examine this in some detail.

Source: Economic Survey of Pakistan 2015-16

Mujhe Kyun Nikala (Why was I ousted?):

When former Prime Minister Nawaz Sharif repeatedly asks "Mujhe Kyun Nikala" (Why was I ousted), he appears to be arguing that, because of his government's unquestionably better performance than his predecessor PPP government's, he deserves to be forgiven without explicitly asking for forgiveness. What are his sins? His biggest sin is that he and his family have accumulated large amount of unexplained wealth in offshore shell companies during his three terms as Pakistan's prime minister. He and his family did not disclose this wealth until they were forced to acknowledge it after Panama Papers leaks. They were given ample opportunity by the Pakistan Supreme Court to prove that it was acquired by legitimate means. But they failed to do so.

Mr. Sharif and his family are not unique as owners of unexplained offshore wealth. Washington-based Global Financial Integrity (GFI) estimates that developing countries have lost as much as $13.4 trillion through unrecorded capital flight since 1980. Bloomberg reports that Pakistanis own $150 billion worth of undeclared offshore assets, attributing this estimate to Syed Muhammad Shabbar Zaidi, a partner at Karachi-based A.F. Ferguson and Co. -- an affiliate of PricewaterhouseCoopers LLP.

Iqama (Foreign Residency) vs Panama:

Mr. Sharif says that he was removed for "iqama", not "Panama". What he doesn't acknowledge is that having "iqama" (foreign residency) facilitates "Panama", the hiding of assets in offshore locations.

Assets held by people in offshore tax havens are tracked by their country of residence, not by their citizenship, under OECD sponsored Agreement On Exchange of Information on Tax Matters. Pakistan is a signatory of this international agreement. When Pakistan seeks information from another country under this agreement, the nation's FBR gets only the information on asset holders who have declared Pakistan as their country of residence. Information on those Pakistanis who claim residency (iqama) in another country is not shared with Pakistani government. This loophole allows many Pakistani asset holders with iqamas in other countries to hide their assets. Many of Pakistan's top politicians, bureaucrats and businessmen hold residency visas in the Middle East, Europe and North America.

Summary:

The last five years of Pakistan's outgoing government of the Pakistan Muslim League (Nawaz) have seen the revival of Pakistan's economy and completion of many long delayed infrastructure and energy projects. Mr. Nawaz Sharif deserves full credit for it. At the same time, the PML government is responsible for slow progress on human development indicators, major decline in exports, growing twin deficits of budget and external accounts, mounting public debt and lack of transparency in financial matters. It is the lack of transparency that has been brought in sharp focus with the removal of Prime Minister Nawaz Sharif by the nation's Supreme Court in the aftermath of Panama Papers. The leak of these papers revealed his family's ownership of undeclared and unexplained substantial assets abroad.

Related Links:

Haq's Musings

South Asia Investor Review

CPEC Transforming Pakistan's Least Developed Regions

Pakistan: The Other 99% of the Pakistan Story

How Pakistan's Corrupt Elite Siphon Off Public Funds

Bumper Crops and Soaring Credit Drive Tractor Sales

Panama Leaks

How West Enables Corruption in Developing Countries

Declining Terror Toll in Pakistan

Riaz Haq's YouTube Channel

Tuesday, February 1, 2011

India at Davos: Story of Corruption and Governance Deficit

Brand India has lost its luster at Davos in 2011!

Poor governance and corruption are endemic in India, and have been the talk of the town at Davos this year, tarnishing the meticulously crafted image of "Shining India" at the World Economic Forum since 2006. The immediate effect is that that India's foreign direct investment (FDI) is already down by a whopping 36% in 2010 from 2009, and there is no recovery in sight yet. Meanwhile India's current account deficit is exploding, accounting for about 3.5% of GDP.

In 2006, the "India Everywhere" campaign orchestrated by Indian planning commission officials and the Confederation of Indian Industry (CII) dominated the ambiance of the World Economic Forum at Davos, Switzerland. They spent two years and more than $4 million and put together an elaborate marketing and PR campaign to ensure that the "India story" got prominent play and did not get drowned in the noise at Davos. The success of the initiative was apparent by the dramatic increase in FDI inflow to India which doubled from less than 1% of GDP to nearly 2% of the expanded GDP in 2008.

Here is how Times of India reported the scene from Switzerland in 2006:

For once, India is really everywhere at Davos. With the 35th World Economic Forum (WEF) opening at the Swiss mountain resort, one cannot help but notice India Everywhere.

Right from the moment you step off the aircraft at Zurich airport, big hoardings proclaiming India greet you. Upon reaching Davos, located about 150 km from Zurich, the Indian colours are just about everywhere.

In fact, you see more of India than Switzerland in Davos this year.

The buses wear Indian colours, the bus shelters have Indian advertisements, and key bars, pubs and hotels in the city where the economic meet began Wednesday evening are serving up Indian snacks and Indian wines and beer.

Reports from the World Economic Forum at Davos in 2011 offer a very different narrative.

Coming after the massive multi-billion dollar telecom corruption scandal in 2010 and expression of deep concern by some prominient India businessmen about the nation's governance deficit in 2011, India's presence at the World Economic Forum 2011 was decidedly lower key when compared with the heady days of 2006.

Summing up the sentiment at Davos, an Indian journalist opined as follows: "..such a forthright disregard for the so-called "India story" may understandably offend nationalist sentiments and bring on the "west versus rest" polarization that keeps many public intellectuals in business. But the harsh truth is that India has been sold, resold and re-re-sold in so many samosa and Sula evenings that it has lost novelty."

Here's a video clip on India's massive corruption:

Related Link:

Haq's Musings

Indian Economy: Hard or Soft Landing in 2011?

Pakistani Economist Saadia Zahidi at World Economic Forum

Inaction Against Corruption in South Asia

2G Corruption Scandal in India

Musharraf at Davos 2008

Imran Khan at Davos 2011

Delhi in Davos: How India Built its Brand at the World Economic Forum

FDI India, Pakistan, China and Vietnam 2003-2010

China's Trade and Investment in South Asia

India and Pakistan at Davos 2009

India's Twin Deficits

Pakistan's Economy 2008-2010

Inflation Hits India

Goldman Sachs India Warning on Twin Deficits

India's Nov 2010 Imports, Exports

Sunday, December 11, 2011

Goldman's O'Neill "Disappointed" as India "Explodes"

For at least two years in a row, BRIC has, in the words of SGS's Albert Edwards, stood for Bloody Ridiculous Investment Concept, not an acronym for populous emerging markets of Brazil, Russia, India and China as Goldman Sachs' Jim O'Neill saw it ten years ago.

In fact, O'Neill has himself expressed disappointment in India, one of the BRICs, a designation that has boosted foreign investment in India and helped accelerate its economic growth since 2001.

"All four countries have become bigger (economies) than I said they were going to be, even Russia. However there are important structural issues about all four and as we go into the 10-year anniversary, in some ways India is the most disappointing," said O'Neill as quoted by Reuters.

Noting India's significant dependence on foreign capital inflows, Jim O'Neill went further and raised a concern about the potential for current account crisis. "India has the risk of ... if they're not careful, a balance of payments crisis. They shouldn't raise people's hopes of FDI and then in a week say, 'we're only joking'". "India's inability to raise its share of global FDI is very disappointing," he said.

United Nations data shows that India received less than $20 billion in FDI in the first six months of 2011, compared to more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively. Stocks in all four countries have underperformed relative to the broader emerging markets equity index, as well as the markets in the developed nations. Pakistan's KSE-100 has significantly outperformed all BRIC stock markets over the ten years since BRIC was coined.

As India's twin deficits continue to grow and the Indian rupee hits record lows relative to the US dollar, there is pressure on Reserve Bank of India to defend the Indian rupee against currency speculators who may precipitate a financial crisis similar to the Asian crisis of 1997.

In addition to Jim O'Neill, a range of investment bankers are turning bearish on India. UBS sent out an email headlined "India explodes" to its clients. Deutsche Bank published a report on November 24 entitled, "India's time of reckoning."

"Suddenly everything seems to be coming to a head in India," UBS wrote. "Growth is disappearing, the rupee is in disarray, and inflation is stuck at near-record levels. Investor sentiment has gone from cautious to outright scared."

India's current account deficit swelled to $14.1 billion in its fiscal first quarter, nearly triple the previous quarter's tally. The full-year gap is expected to be around $54 billion.

Its fiscal deficit hit $58.7 billion in the April-to-October period. The government in February projected a deficit equal to 4.6 percent of gross domestic product for the fiscal year ending in March 2012, although the finance minister said on Friday that it would be difficult to hit that target.

As explained in a series of earlier posts here on this blog, India has been relying heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its rising current account gap. Those flows are called "hot money" and considered highly unreliable.

Indian policy makers face a significant dilemma. If they do nothing to defend the Indian currency, the downward spiral could make domestic inflation a lot worse than it already is, and spark massive civil unrest. If they intervene in the currency market aggressively by buying up Indian rupee, the RBI's dollar reserves could decline rapidly and trigger the balance of payment crisis Goldman Sachs' O'Neill hinted at.

Related Links:

Haq's Musings

India's Twin Deficits

Karachi Tops Mumbai in Stock Performance

India Returning to Hindu Growth Rate

Soft or Hard Landing For Indian Economy?

Karachi Stocks Outperform Mumbai, BRICs

Saturday, September 12, 2020

Thirlwall Law: Why Hasn't Pakistan's GDP Grown Faster Than 5% Average Since 1960s?

Pakistan's economy has grown at a compounded annual growth rate (CAGR) of about 5% since the 1960s. While Pakistan's average 5% annual economic growth rate is faster than the global average, it falls significantly short of its peer group in Asia. The key reason is that, unlike Pakistan's, the East Asian nation's growth has been fueled by rapid rise in exports. History shows that Pakistan has run into balance of payments (BOP) crises whenever its growth has accelerated above 5%. These crises have forced Pakistan to seek IMF bailouts 13 times in its 73 year history. Pakistan's current account deficits would be a lot worse without 23X growth in remittances from overseas Pakistanis since year 2000. What Pakistan has experienced is BOP-constrained growth as explained in 1979 by Thirlwall Law, a law of economics named after British economist Anthony Philip Thirlwall. Another reason why Pakistan has lagged its Asian peers in terms of economic growth is its lower savings and investment rates. Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period pf multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now. This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018. The best way for Pakistan to accelerate its growth beyond 5% in a sustainable manner is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments.

History of Pakistan's IMF Bailouts

Economic Growth Since 1960:

The World Bank report released in June, 2018 shows that Pakistan's GDP has grown from $3.7 billion in 1960 to $305 billion in 2017, or 82.4 times. In the same period, India's GDP grew from $37 billion in 1960 to $2,597 billion in 2017 or 71.15 times. Both South Asian nations have outpaced the world GDP growth of 60 times from 1960 to 2017.

While Pakistan's GDP growth of 82X from 1960 to 2017 is faster than India's 71X and it appears impressive, it pales in comparison to Malaysia's 157X, China's 205X and South Korea's 382X during the same period.

GDP Growth in Current US$ 1960-2017. Source: World Bank

Thrilwall's Model:

Thrilwall's BOP-constrained growth model says that no country can sustain long-term growth rates faster than the rate consistent with its current account balance, unless it can finance its growing deficits. Indeed, if imports grow faster than exports, the current account deficit has to be financed by borrowing from abroad, i.e., by the growth of capital inflows. But this cannot continue indefinitely. Here's how Jesus Felipe, J. S. L. McCombie, and Kaukab Naqvi describe it in their May 2009 paper titled "Is Pakistan’s Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth" published by Asian Development Bank:

"The reason is straightforward. If the growth of financial flows is greater than the growth of GDP, then the net overseas debt to GDP ratio will rise inextricably. There is a limit to the size of this ratio before international financial markets become distinctly nervous about the risk of private and, especially in less developed countries, public default. If much of the borrowing is short-term, then there is danger of capital flight, precipitating the collapse of the exchange rate. Not only will this cause capital loses in terms of foreign currency (notably United States [US] dollars) of domestic assets owned by foreigners (the lenders), but it will also cause severe domestic liquidity problems. This is especially true of many developing countries as overseas borrowing by banks and firms is predominantly denominated in a foreign currency, normally US dollars. As the exchange rate plummets, so domestic firms have difficulty finding domestic funds to finance their debt and day-today operations, often with disastrous consequences."

Investment as Percentage of GDP Source: State Bank of Pakistan

Pakistan's Rising Current Account Deficit:

Pakistan's external debt has been rising rapidly in recent years to fund its ballooning twin deficits of domestic budget and external accounts. It pushed the external debt service cost to $12 billion in fiscal 2019-20, and added to the trade deficit of nearly $24 billion. Remittances of $21 billion from Pakistani diaspora reduced the current account deficit to $11 billion, but still forced the new PTI government to seek yet another IMF bailout with its stringent conditions to control both fiscal and current account deficits. These conditions resulted in dramatic slow-down in the country's GDP growth.

Pakistan's External Debt. Source: Wall Street Journal

Pakistan's Exports:

Pakistan’s exports have continued to lag behind that of its South Asian competitors since the early 1990s. Bangladesh’s exports have increased by 6.2 times compared to Pakistan’s, measured in terms of exports per capita, and that of India by 6.8 times, according to Princeton's Pakistani-American economist Atif Mian.

Exports Per Capita in South Asia. Source: Dawn

Balance of Payments Crises:

Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period of multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now. This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018.

Export Growth in South Asia. Source: WSJ

Savings and Investment:

The second reason why Pakistan lagged its Asian peers in terms of economic growth is its lower savings and investment rates. There's a strong relationship between investment levels and gross domestic product. The more a country saves and invests, the higher its economic growth. A State Bank of Pakistan report explains it as below:

"National savings (in Pakistan) as percent of GDP were around 10 percent during 1960s, which increased to above 15 percent in 2000s, but declined afterward. Pakistan’s saving rate also compares unfavorably with that in neighboring countries: last five years average saving rate in India was 31.9 percent, Bangladesh 29.7 percent, and Sri Lanka 24.5 percent..... Similarly, domestic savings (measured as national savings less net factor income from abroad) also declined from about 15 percent of GDP in 2000s, to less than 9 percent in recent years. Domestic savings are imperative for sustainable growth, because inflow of income from abroad (remittances and other factor income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks".

Net Foreign Direct Investment Source: State Bank of Pakistan

21X Remittance Growth Since Year 2000:

Remittance inflows from Pakistani diaspora have jumped 21-fold from about $1 billion in year 2000 to $24 billion in 2020, according to the World Bank. In terms of GDP, these inflows have soared nearly 7X from about 1% in year 2000 to 6.9% of GDP in 2018.

Pakistan Remittances in Millions of US Dollars. Source: World Bank

Meanwhile, Pakistan's exports have declined from 13.5% of GDP in year 2000 to 8.24% of GDP in 2017. At the same time, the country's import bill has increased from 14.69% in year 2000 to 17.55% of GDP in 2017. This growing trade imbalance has forced Pakistan to seek IMF bailouts four times since the year 2000. It is further complicated by external debt service cost of over $6 billion (about 2% of GDP) in 2017. Foreign investment in the country has declined from a peak of $5.59 billion (about 4% of GDP) in 2007 to a mere $2.82 billion (less than 1% of GDP) in 2017. While the current account imbalance situation is bad, it would be far worse if Pakistani diaspora did not come to the rescue.

Summary:

Pakistan's average economic growth of 5% a year has been faster than the global average since the 1960s, it has been slower than that that of its peers in East Asia. It has essentially been constrained by Pakistan recurring balance of payment (BOP) crises as explained by Thirlwall's Law. Pakistan has been forced to seek IMF bailouts 13 times in the last 70 years to deal with its BOP crises. This has happened in spite of the fact that remittances from overseas Pakistanis have grown 24X since year 2000. Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period pf multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now. This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018. The best way for Pakistan to accelerate its growth beyond 5% is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments.