Wednesday, May 8, 2019

PTI's New Economic Team Line-Up in Pakistan

Who are the members of Pakistan's top new economic leadership team? Who's Reza Baqir? Who's Shabbar Zaidi? Why were the changes necessary? Were the latest changes made to remove previous PMLN government's loyalists considered to be responsible for the current economic crisis? Did their policies and actions contribute to large twin deficits? Did the International Monetary Fund (IMF) force these changes as a condition for the country's bailout?

Pakistan's External Debt. Source: Wall Street Journal

Pakistan Current Account Deficit. Source: State Bank of Pakistan

As Pakistan awaits the news of the discovery of large offshore oil reserves, what lessons should Pakistan learn from the governance failures in Venezuela? Is Venezuela suffering because of its government's hostility toward the United States? Will large oil reserves be a panacea for Pakistan's economic problems?

Viewpoint From Overseas host Faraz Darvesh discusses these questions with Sabahat Ashraf (ifaqeer) and Riaz Haq (

Related Links:

Haq's Musings

South Asia Investor Review

Pakistan's Debt Crisis

Can Pakistan Avoid Recurring IMF Bailouts?

Expectation of Massive Offshore Oil Discovery in Pakistan

CPEC Financing: Is China Ripping Off Pakistan?

Information Tech Jobs Moving From India to Pakistan

Pakistan is 5th Largest Motorcycle Market

"Failed State" Pakistan Saw 22% Growth in Per Capita Income in Last 5 Years

CPEC Transforming Pakistan

Pakistan's $20 Billion Tourism Industry Boom

Home Appliance Ownership in Pakistani Households

Riaz Haq's YouTube Channel

PakAlumni Social Network


Riaz Haq said...

Workers’ #remittances to #Pakistan up 8.4% to $17.8 billion in 10 months. #Remittances from #Pakistani diaspora in #UnitedStates rose at the fastest rate at 21.8% year-on-year to $2.786 billion in the July-April period of FY2019

Workers’ remittances grew 8.45 percent year-on-year to $17.875 billion in the first 10 months of the current fiscal year as foreign inflows from all the key countries continued to show growth during the period, the central bank's data showed on Friday.

Remittances, which are one of the country’s major sources of foreign currency, amounted to $16.481 billion during the corresponding period a year earlier.

Though overseas workers sent more money home during the period under review than a year ago growth slowed to single digit since March 2019 amid below-than-expected inflows from Saudi Arabia and the gulf countries, the major sources of remittances.

The State Bank of Pakistan’s (SBP) data showed that the highest percentage growth was witnessed from the US as remittances from the country rose 21.81 percent year-on-year to $2.786 billion in the July-April period of FY2019. Remittances from the UK increased 16.61 percent to $2.755 billion. Remittances from Saudi Arabia rose 2.08 percent to $4.175 billion. The country received $3.786 billion from UAE, including Dubai, Abu Dhabi and Sharjah during the July-April period, up 4.04 percent over the corresponding period a year earlier. Remittances from other Gulf Cooperation Council countries including Bahrain, Kuwait, Qatar and Oman, however, fell 5.39 percent to $1.717 billion in the first 10 months.

Home remittances contributed to more than six percent to GDP, equivalent to 85 percent of the country’s exports and more than one-third of imports during the last fiscal year of 2017/18.

The government and the central bank have taken a number of initiatives to promote transfer of home remittances using formal financial channels.

Analysts said blockchain technology-based remittance service – known as digital ledger – would complement the efforts as transfer of cross-border remittances in near real time would bring convenience and facilitation for both remitters and their beneficiaries. Remittances fuel consumer spending and foster the central bank’s foreign exchange reserves.

The country needs to attract more remittance flows due to dwindling foreign currency reserves and higher foreign debt payments. The foreign exchange reserves held by the SBP stood at $8.984 billion as of May 3 compared with $8.805 billion in the previous week.

The government expected financing gap to reach $10 to $11 billion in the next fiscal year of 2019/20 with a new economic assistance program from the International Monetary Fund likely to provide cushion to anemic balance of payment position.

In April, inflow of workers’ remittances stood at $1.778 billion, which was two percent higher than the previous month and six percent up compared to the corresponding month a year earlier, according to the SBP’s official data.

nayyer ali said...

Workers remittances are a double edged sword. They give the country 20 billlion in foreign exchange which allows Pakistan to run a 20 billion dollar trade deficit witout incurring a current account deficit. This masks poor export performance and allows the country to maintain an overvalued exchange rate, which would otherwise be marked to market if these remittances were not covering up a multitude of sins. The rapid growth of remittances allowed Pakistan to get by with little or no export growth for the last decade, which ultimately resulted in the current balance of payments crisis.
If the IMF can force the country to keep the exchange rate undervalued that will boost exports, bring the deficit down, and help to build back up forex reserves. The IMF is also going to demand that Pakistan cut subsidies and spending and remove tax breaks such that Pakistan runs a primary budget surplus (before paying interest on government debt). This will be contractionary in the short run. GDP growth this fiscal year looks like it will be a bit over 3%, and likely about the same next year. After that we should begin to see growth finally pick up in a sustainable way.

Riaz Haq said...

Pakistan agrees to 13th bailout in 30 years from the IMF

"Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position," IMF representative Ernesto Ramirez Rigo said in statement.
"This reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses. The authorities recognize the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty."

Khan met with IMF director Christine Lagarde in February, as he sought to secure funding from the agency despite being a longterm critic of its previous dealings in Pakistan.
The IMF has been criticized in the past for imposing strict austerity on receiver nations, forcing governments to cut social programs and privatize national industries.
Khan has spoken of the need for a major anti-poverty program to boost Pakistan's economy and help its worst off citizens, but this will involve considerable spending that is typically antithetical to the conservative IMF.
These types of restrictions are one of the reasons Khan has been publicly attempting to avoid returning to the IMF to seek more funding. In October, Saudi Arabia agreed to advance Islamabad $6 billion in financial support. But that has not been enough to plug the gaps in Pakistan's economy -- issues Khan inherited and has been struggling to get under control.
The Pakistani Prime Minister has also turned to China for help. Beijing has invested heavily in the country under President Xi Jinping's Belt and Road Initiative.
"I can tell you one thing, the Chinese have been a breath of fresh air for us ... They have been extremely helpful to us," Khan said earlier this year.
China's increasing presence in Pakistan has not been without incident, however. On Sunday, militants attacked a five-star luxury hotel in Gwadar, in Balochistan province. The city is at the center of China's multi-billion-dollar Belt and Road infrastructure project.
Five people were killed in the attack, for which a Pakistani separatist group claimed responsibility, warning of more attacks in China and Pakistan in a post on an unverified Twitter account. CNN could not independently confirm whether the account, which claims to belong to the Baolchistan Liberation Army, is authentic.

Riaz Haq said...

Foreign #investors return to #Karachi #Stock Exchange in #Pakistan with the purchase of $6.9 million of shares yesterday, the second-biggest single-day purchase this year, after the country secures a new #IMF loan. #economy #PTI #KSE100 via @markets

Overseas funds returned to Pakistani stocks on Monday after the nation secured a $6 billion loan from the International Monetary Fund, even as domestic investors fueled the market’s biggest decline this year.

Foreigners bought $6.9 million of shares yesterday, the second-biggest single-day purchase this year. That’s as the benchmark KSE-100 Index fell 2.4% at close, the most in more than five months.

Foreigners “will welcome the loan’s conditions, which mean that policy is going to stay on a credible and reformist path,” said Hasnain Malik, head of equity strategy at Dubai-based Tellimer. The loan “improves foreign investor confidence,” he said.

The agreement with the IMF comes after a sixth-month period that saw rating companies downgrading Pakistan’s credit score and stocks hitting a three-year low. The slump has left the KSE-100 Index trading at a price-to-book ratio of 1.1, the lowest reading in at least a decade, according to Malik.

NICOP said...

Riaz sb, what would be a realistic price for rupee for overseas Pakistanis to send in money. Lost $ savings due to exchange erosion. Do you suggest early withdrawal for Pak Banao bonds?

Anonymous said...

USD 150 pkr where is the export boom?

Riaz Haq said...

Anon: "so where is the export boom?"

Exports are rising in terms of product volume but not in terms of dollar volume because of major currency devaluation right now.

Over time, as rupee stabilizes, the dollar volume will rise.

Read up on J curve.

"Immediately after the devaluation of a currency, the immediate reaction is that exports will remain unchanged while imports will increase. Traders with preexisting contracts with foreign producers and manufacturers will honor their agreements. In the short run, there will be a lag in changing the consumption habits of imports, and there will be an immediate jump followed by a lag until traders stop importing expensive products. The demand for expensive imports and the demand for cheaper exports will be unchanged in the short run, as consumers look for cheaper alternatives.

The long-term implication of currency devaluation or depreciation is that local consumers will switch to comparable locally-produced products. Also, foreign traders will purchase more products that are being exported to their country than they will buy their country’s products. The products exported to their country are relatively cheaper due to the weakened currency value. At this stage, the country experiences the desired outcome of improving the current account balance. The J Curve forms when the country’s currency appreciates and the value of exports become more expensive than the value of imports."

Riaz Haq said...

NICOP: "Do you suggest early withdrawal for Pak Banao bonds?"

I think a better play for expats is to invest in PAK ETF on current weakness.

Foreign investors are net buyers of Pakistani shares right now.

Here's Bloomberg:

Overseas funds returned to Pakistani stocks on Monday after the nation secured a $6 billion loan from the International Monetary Fund, even as domestic investors fueled the market’s biggest decline this year.

Foreigners bought $6.9 million of shares yesterday, the second-biggest single-day purchase this year. That’s as the benchmark KSE-100 Index fell 2.4% at close, the most in more than five months.

Riaz Haq said...

#SaudiArabia grants $9.6 billion payment holiday to #Pakistan. #Saudis would postpone demand for payments of $275m a month for #oil for the next three years, totaling $9.6 billion. via @financialtimes

Pakistan is facing a fiscal crisis, with weak growth, rising inflation and dwindling foreign exchange reserves that barely total enough to cover two months of imports. Prime minister Imran Khan’s government reached a preliminary agreement on a three-year $6bn bailout with the IMF this month that comes with the requirement to implement harsh structural reforms.

The Saudi payments deferral follows Riyadh’s decision in October to grant a $6bn loan to Mr Khan’s government in October 2018. Half of that loan was used as temporary relief to boost Pakistan’s sagging reserves, while the other half was earmarked for oil payments for the fiscal year ending in June.

The announcement comes as Saudi Arabia is working to strengthen its position in the region following a rise in decades-old hostility between the US and Iran, and ahead of this week’s scheduled visit to Pakistan by Javad Zarif, Iran’s foreign minister.

“The timing is very critical. The conflict matrix of the region and rising tension is once again creating politics of alliance,” said Huma Baqai, a professor of international relations at the Institute of Business Administration, Karachi. “The payment deferral is largely to keep Pakistan in the Saudi Arabia-US camp.”

Pakistan has officially said it is neutral on the Iran-US issue. Shah Mehmood Qureshi, the country’s foreign minister, said last week that Islamabad would “not join any camp in case of a conflict”.

If tension spirals out of control, Saudi Arabia may lean on Pakistan for security support, said Zahid Hussain, Pakistan author and political analyst. “Saudi Arabia has always seen Pakistan as part of its security network, including its nuclear weapons,” said Mr Hussain. “Riyadh will expect Pakistan to come to its aid if there is a flare-up in Iran.”

The US could also be using Saudi Arabia to press Pakistan into helping deliver a lasting peace agreement with the Taliban in Afghanistan, said Asfandyar Mir, South Asia analyst at Stanford University. “Pakistan can definitely ramp up the pressure on the Afghan Taliban,” said Mr Mir. “Things are not looking good and I think the US wants Pakistan to do more.”

The last time Riyadh struck a similar deal with Islamabad was 21 years ago, when Pakistan was hit by global sanctions following its first nuclear tests.

A separate oil payments deferral with the UAE appears to have been scrapped, according to a senior government official, declining to give a reason for the decision. The official said he expected the UAE to lend another $1bn by the end of June, bringing the total amount of UAE support in the current July to June financial year to $3bn.

Riaz Haq said...

#Kuwait plans big investment across #Pakistan with initial #investment fund of $20 billion. Kuwait investing in Pakistan since 1960 in companies like Meezan Bank, Careem and Pak-Kuwait Investment Company. Now planning 500 MW power plant in #Balochistan

“The mode of investment will depend on the viability of projects,” he said, adding that the projects might require guarantees and a recovery mechanism.

He (KIA representative Dr Ahmad Idrees) recalled that Kuwait had been investing in Pakistan since 1960 and had entered into collaboration with many companies including Meezan Bank, Careem and Pak-Kuwait Investment Company.
“Now, it is the second phase of major investment,” he said.
Idrees pointed out that KIA had also signed a memorandum of understanding with the Balochistan government for setting up a 500-megawatt power plant.
For streamlining projects and strengthening the investment programme, a three-member coordination committee, headed by Special Assistant to Chief Minister Ashfaq Memon, was also constituted. It was tasked with finalising the projects after due consultations with the stakeholders.

KIA’s representative revealed that his country focused mainly on food security and desired to extend financial and technical assistance to projects related to food security. “Hence, agricultural and livestock projects including food preservation can be included.”

Idrees said his company was also ready to construct a large number of houses in Sindh with payments in easy installments – for instance Rs20,000 a month. “This formula has proved very successful throughout the world,” he said.

Speaking during the meeting, the Sindh minister for works, services and irrigation highlighted that the provincial government mainly focused on food security in the province.

He told the KIA representative that Pakistan Peoples Party Chairman Bilawal Bhutto-Zardari also held a meeting of provincial departments to discuss problems related to food security and issued directives for taking every possible step to overcome the challenge.

Sindh Forest and Livestock Secretary Abdul Rahim Soomro, who was also present in the meeting, said the Sindh government was interested in steering bio-diversity and improving the ecosystem.

“Keeping food security in view, there is a need for developing wetlands,” he said in response to KIA’s willingness to release funds for food security.

Sindh Minister for Local Government Saeed Ghani pointed out that although the provincial government had forged partnerships with the World Bank and Asian Development Bank, “we need additional partners for swift development including that of slum areas.”

He said Sindh was completely prepared to receive investment from Kuwait and other countries.

In response to the KIA’s offer to construct houses in Sindh, some mega development projects were identified by the Works and Services Department, which included the construction of a bridge parallel to the Guddu Barrage to ease the traffic load on it.

Riaz Haq said...

#Pakistan sets FY 2020 #GDP #growth target at 4%. Sees FY 2019 GDP growth at just 3.3%, sharply below target. #economy via @YahooFinance

Pakistan's Finance Ministry expects economic growth in the financial year ending in June to hit 3.3%, well below a target of 6.2% set last year, with key sectors all performing worse than expected, according to a planning document seen by Reuters.

The document also sets a target of 4% growth for the 2020 financial year, underlining the economic headwinds facing the government of Prime Minister Imran Khan.

The targets are due to be published officially on Monday ahead of the budget on June 11, which is expected to include tough austerity measures following a provisional bailout agreement with the International Monetary Fund.

Khan's government came to power in August facing a yawning budget deficit expected at around 7% of gross domestic product as well as a balance of payments crisis, with foreign exchange reserves that cover less than three months of imports.

It has promised reforms to stimulate exports, cut the deficit and overhaul the power sector, and has pushed ahead with an ambitious infrastructure development project with China. But Pakistani households have struggled, with inflation running at more than 9%.

Key sectors in Pakistan's economy are all performing below the levels foreseen in last year's budget, which was passed under the previous government of Shahid Khaqan Abbasi.

Agriculture is seen growing just 0.8% compared with a 3.8% target, industrial output is set to rise 1.4% against a 7.6% target and services are forecast to grow 4.7%, compared with a target of 6.5%.

Riaz Haq said...

Economy suffers major setback in FY19, growth rate slows to 3.3pc
Mubarak Zeb Khan

Pakistan’s economy suffered a major setback with all key sectors failing to perform according to expectations resulting in just 3.3 per cent economic growth rate, significantly short of 6.2pc growth target for the year 2018-19.

“Growth of agricultural, industrial and services sectors is 0.85pc, 1.4pc and 4.7pc respectively,” said an official announcement on Thursday, painting a dismal performance of the overall economy in the first year of Pakistan Tehreek-i-Insaf government. “The provisional growth of GDP for the year 2018-19 has been estimated at 3.3 pc”.

The government has anticipated 3.8pc in agriculture, 7.6pc in industry and 6.5pc in services, thus target of 6.2pc GDP growth. All these targets fell flat.

These figures were framed in the 101st meeting of the National Accounts Committee — chaired by Secretary Planning, Development and Reform Zafar Hasan — to review the Gross Domestic Product (GDP). Provisional estimates for the year 2018-19 for GDP and Gross Fixed Capital Formation (GFCF) have been presented on the basis of the latest data available for six to nine months.

As per the available data, the crop sector faced the consequences of acute water shortages during the first half of the 2018 and thus only wheat depicted positive growth of 0.5pc and cotton, rice and sugarcane witnessed negative growth at -17.5pc, -3.3pc, and -19.4pc, respectively.

Other crops (such as onion, tomatoes and fruits) showed growth of 1.95pc mainly because of increase in production of pulses and oil seeds. Livestock sector registered a growth of 4pc whereas forestry has grown at 6.5pc due to increase in production of timber.

Agriculture sector is targeted to grow by 3.8 percent on the basis of expected contributions of Important Crops (3pc), other crops(3.5pc), cotton ginned (8.9pc), livestock (3.8 pc), fisheries (1.8 pc) and forestry (8.5 pc). All these targets were missed except the one related to livestock.

The overall industrial sector on the other hand showed an increase of 1.4pc. The mining and quarrying sector declined by 1.96pc. The large scale manufacturing (LSM) sector, which is driven primarily by QIM data (from July 2018 to February 2019), showed a contraction of 2.1pc.

Electricity and gas sub-sector has grown by 40.5pc mainly due to better performance of Wapda and distribution companies and IPPs. The construction activity has decreased by 7.6pc.

Industrial sector is targeted to grow by 7.6pc during 2018-19. Manufacturing sector is targeted to grow by 7.8pc with LSM growth rate of 8.1pc, small scale and household manufacturing 8.2pc, construction 10pc and electricity generation and distribution and gas distribution by 7.5pc.

Services sector remained major contributor to economic growth as its value added increased by 4.7pc. Within services sector, wholesale and retail trade sector grew by 3.1pc whereas transport, storage and communication sector has registered a growth of 3.3pc.

Finance and insurance sector shows an overall increase of 5.1pc on account of positive contributions from scheduled banks (5.3pc), non-schedule banks (24.6pc) and insurance activities (12.8pc) despite decline in central banking by 12.5pc. General government services has grown by 7.99pc and other private services, a set of computer related activities, education, health and social work, NGOs etc. has contributed positively at 7.1pc.

Riaz Haq said...

New #Pakistan central bank boss Reza Baqir dismisses free floating #rupee idea. The nation's #currency will not be left completely to the #market. The State Bank of Pakistan #SBP will intervene when necessary to stabilize it

Pakistan’s new central bank governor Reza Baqir on Monday dismissed the idea of a free floating rupee as he outlined reforms aimed at ending instability in the South Asian economy.

Baqir was last month appointed to lead the central bank in Pakistan, which has been hit by ballooning current and fiscal account deficits and repeated devaluations of the rupee.

Pakistan’s policy is a “market based exchange rate system” that follows supply and demand, but that will not be left completely to the market, Baqir said in his first press conference as State Bank of Pakistan (SBP) governor.

“So, if there is a volatility, then state bank intervenes. You need to keep a close eye on the market. That is our regime and we want to go with this regime,” Baqir added.

Pakistan’s currency has lost almost 50% of its value since December 2017, stoking inflation and putting pressure on the government as voter anger at higher prices grows.

Last week Pakistan’s finance ministry signalled that worse is to come, with economic growth of 3.3% in the financial year ending June, well off the government’s target of 6.2%, with growth seen falling to 2.4% in 2019/2020.

Pakistan agreed in principle to a $6 billion International Monetary Fund (IMF) bailout in April amid speculation that the fund wanted Pakistan to adopt a free float as part of any assistance package.

Baqir, an ex-senior IMF economist, said that the government was enacting economic reforms aiming to shore up confidence.

This included ending the “strong rupee” policy, which had led to pressures building up within the economy, but would not extend as far as a fully free floating currency.

“An exchange rate that remains fixed for a long time is not in our favour. On the other hand, a free float also is not suitable,” Baqir said in the coastal financial hub of Karachi.

Pakistan has always said the rupee is freely traded, but traders say the central bank underpins the exchange rate in a thinly traded market in what is a de facto managed float system.

The previous government pursued a strong rupee policy, effectively fixing the rupee against the dollar at a rate that the IMF and analysts said was too high, leading the country to burn through its foreign currency reserves to defend the rupee.

Baqir said the central bank’s independence was vital and it will now follow market realities, adding that it will no longer give loans to the government and cut money printing by the central bank that has stoked inflation.

“This is very big improvement for financial and monetary policy,” he said. (Additional reporting by Asif Shahzad: Writing by Drazen Jorgic; Editing by Alexander Smith)

Riaz Haq said...

Fitch cuts growth for #Pakistan to 3.2% in FY2018/19 and 2.7% in FY19/20 with tighter monetary/fiscal policies. #CPEC will provide support to #economy. "Construction of many key CPEC projects has already started and will stretch over the coming years.”

Fitch Solutions, the US-based global research house, has revised down Pakistan’s economic growth forecast, believing tightening of monetary and fiscal policies under the International Monetary Fund (IMF) bailout would negatively impact GDP growth.

“We at Fitch Solutions, have revised our forecast for Pakistan’s real GDP (gross domestic product) growth for FY2018/19 (July-June) and FY19/20 to come in at 3.2% and 2.7% respectively, from 4.4% and 4.0% previously (versus the Bloomberg consensus of 3.3% and 3.5%),” the global research house said in a report on ‘Economic Analysis – IMF deal to weigh on Pakistan’s growth in the short run.’

“We believe that the bailout package from the IMF will see tighter monetary and fiscal policies in Pakistan, which will be negative for growth in the near term,” it said.
However, investment into the China-Pakistan Economic Corridor (CPEC) will continue to provide some support to the economy, it added.

After close to eight months of negotiations, Pakistan reached an agreement with the IMF in May for a $6 billion bailout package to address its balance of payment crisis. Following the agreement, the State Bank of Pakistan (SBP) increased the policy rate by 150bps.

Shortly after, the Ministry of Finance presented a budget in June with the aim of trimming Pakistan’s primary deficit to 0.6% of GDP in FY19/20, from 1.9% of GDP in FY18/19 according to the IMF’s estimates. “Given the tighter monetary and fiscal policies amid an already subdued economic growth outlook, we at Fitch Solutions have revised (down) our forecast for Pakistan’s real GDP growth,” it said.