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 IMF. Sort by date Show all posts

Tuesday, December 16, 2008

Pakistan to Swallow IMF's Bitter Medicine

The International Monetary Fund (IMF) has approved a 23-month, US $7.6 billion loan to Pakistan in November to avert a severe current accounts deficit and Pakistan's debt default. On November 27, the IMF released to Islamabad a first installment of $3.1 billion, in it first "bailout" of an Asian country during the current world financial crisis.

Prior to this news, Pakistan's President Asif Ali Zardari knocked on many doors and begged unsuccessfully for billions of dollars in assistance for months from "Friends of Pakistan" (FOP), a group of countries including China, Saudi Arabia and the United States. This was part of an effort by Pakistan's new president to avoid going to the International Monetary Fund (IMF).

Why did the FOP decline to help? Why was Mr. Zardari trying to avoid an IMF bailout? Let's try and examine the answers to these two important questions being asked.

Friends of Pakistan:

Being friends, the FOP know a lot about Pakistan and Mr. Zardari. They have been watching Pakistani economy's return to the bad old days. While each of the friends genuinely wants to help in stabilizing Pakistan's economy, they have major concerns about the need for transparency and fiscal discipline before committing their money to help their friend. Given Mr. Zardari's reputation as Mr. Ten Percent, they are reluctant to write checks with no strings attached. In other words, they want to trust but verify, an objective that seems achievable if the IMF is involved in closely supervising Pakistan's budget, spending and economy.

Avoiding IMF:

Mr. Zardari has tried to avoid borrowing from the IMF for several reasons. For example, he does not want any one watching over his shoulders as he transacts business as usual. Another reason is that the IMF imposes tough conditions and budgetary restrictions that are usually unpopular and hurt the democratic government's chances of staying in power. The IMF makes the system of political patronage in a feudal society more difficult, if not impossible. Pakistanis have bitter memories of the IMF austerity programs implemented by the PPP and Pakistan Muslim League (Nawaz) governments in the late 1980s and 1990s. Fearing a hostile public reaction and not wanting to accept a further loss of Pakistani "sovereignty" under conditions where the US is routinely carrying out military operations within Pakistan, the PPP-led government long hesitated in seeking a loan from the IMF. Earlier, President Musharraf's government had ended Pakistan's dependence on IMF by economic reforms that created confidence in Pakistan's economy and brought significant foreign investments to Pakistan. That confidence has disappeared after Musharraf's departure from the scene.

IMF's Tough Conditions:

1. Pakistan's central bank must tighten money supply. In order to pave the way for the IMF loan, Pakistan's central bank raised its bank lending rate in early November by 2 percentage points to 15 percent and the state bank has let it be known that a further 1.5 percentage point hike will be implemented in January. The justification for such high interest rates is the high inflation rate in excess of 20% in Pakistan, mainly due to high food and energy prices. Removal of subsidies is making it worse, in spite of declining world oil prices. Tighter money supply will almost certainly hurt businesses, consumers and overall employment, forcing a major recession. According to an Asia Times Online report, Anjum Nisar, the president of the Karachi Chamber of Commerce and Industry, has said, "Pakistan's industrial landscape may soon be marked with dead and sick units and there will be massive unemployment because of the devastating impact on businesses of the higher cost of bank loans arising from the interest rate increase." The liquidity crunch resulting from IMF's tough conditions will turn the already precarious situation of Pakistan's poor daily wage earners into a disaster. Increase in hunger and poverty will hurt Pakistani government's ability to fight Islamist insurgency and maintain peace and stability.

2. Pakistan government must cut spending and raise taxes. The IMF economic stabilization package calls for the government's annual budget deficit to "be reduced from 7.4 percent of GDP in 2007/2008 (July-June) to 4.2 percent in 2008/2009 and 3.3 percent in 2009/2010." The IMF added, "This fiscal adjustment will be achieved primarily by phasing out energy subsidies, better prioritizing development spending, and implementing strong tax policy and administration measures." This condition will also lead to a deep and prolonged recession in Pakistan.

3. The IMF wants Pakistan to raise tax revenue from the present 10 percent of gross domestic product (GDP) to 15 percent by 2013. Neighboring India's total tax revenue, including levies on income, imports and sales, also amounts to less than 10 percent of GDP now. In China, the figure is 20 percent, and among the members of the Organization for Economic Cooperation and Development it averaged 37 percent in 2001. As part of a plan to increase tax revenue, the IMF is pressing Pakistan for the introduction of a tax on agricultural income. Pakistan's large landowners have tenaciously resisted such proposals in the past. Should Islamabad ultimately impose a tax on agricultural income, it will only be after a bitter struggle within the Pakistani feudal ruling class over how to design it to be regressive to make small producers bear a disproportionate share of the tax burden.

4. IMF does not require defense spending cuts, further exacerbating the economic impact on ordinary citizens. The IMF, which is controlled by the US and other western powers, made no demands for cuts to Pakistan's massive military budget. Juan Carlos Di Tata, IMF senior special adviser for the Middle East and Central Asia, expressed concern about the rise in Pakistan's defense spending, but then added that the question of Pakistan's military expenditure had been excluded from the bank's negotiations with the country's Pakistan People's Party-led coalition government. "The issue of defense spending was not discussed during the program negotiations," said Di Tata. "Defense spending is basically an item that was determined by the government and included in the budget projections for this fiscal year. There was no discussion of this topic."

What's Next:

According to the IMF, even after last month's IMF loan, Pakistan will need another $20 billion "to get control over its imbalances." The FOP are scheduled to meet January 13-16 to decide on additional non-IMF assistance to Pakistan. Most likely, they will want IMF to continue supervising Pakistan's economy as a condition for their assistance.

While the US economic revival is planned with multiple stimulus packages, near-zero interest rates and tax cuts to increase liquidity for government, business and consumer spending, it seems the IMF prescription for Pakistan is quite the reverse. It is a basic economic fact that raising taxes does not increase revenue during a slowdown. Rather than close the budget gap, attempts to raise revenue cause a downward economic spiral. Instead of softening the impact on businesses and consumers, the austerity measures will clearly hurt the average and poor Pakistanis disproportionately and cause a great deal of suffering leading to greater political instability in the country. An unstable Pakistan is in no one's interest. But,what is good for the goose is apparently not good for the gander, according to the IMF's perverse logic.

Sunday, October 26, 2008

Aziz Leads IMF Criticism as Crisis Grows

The International Monetary Fund has come under severe criticism as the financial crisis that started on Wall Street is spreading to the developing world. IMF is the most important multi-lateral financial institution. It is responsible for overseeing the global financial system and the economic policies of its 185 members. The IMF is supposed to act as an early warning system for markets and economies. The institution is also charged with diagnosing economic problems and proactively regulating and stabilizing the international financial system to prevent and manage the kind of financial crisis the world is facing now.

Pakistan's former Prime Minister Shaukat Aziz, credited with reviving Pakistan's economy, is taking the IMF to task for being absent, or at least tardy. Mr. Aziz accused the International Monetary Fund last week of failing to show leadership during what he described as a "historic" global financial crisis.

As world leaders met to shore up distressed financial institutions, Mr Aziz charged that "this global institution which is supposed to look at everything going on was not even in the room where meetings are going on."

Speaking at an international business conference in Manila, the former Wall Street banker said interest rate cuts, recapitalization of banks and liquidity injections, while helpful, would not be sufficient to solve the problem.

"The very fabric of the global financial system is under threat," Aziz said, according to AFP.

Mr Aziz suggested there was a need to boost the IMF's regulatory powers and create a more powerful body.

"The world is becoming increasingly specialized," he said, adding that existing systemic threats beyond the agency's traditional monetary policy role must be addressed. "A robust regulatory regime must touch all the stakeholders," he said, with reference to the credit rating agencies that have come in for criticism amid the crisis.

Mr. Aziz was pointing out the fact that the banks and capital are now global. Most major financial institutions operate in multiple countries on different continents, and it is hard to draw national boundaries on regulation. In such an environment, international regulatory regime and international action to correct problems are required.

In its defense, it can be said that the IMF is not alone in being taken by surprise by the depth of the crisis, said Mr. Michael Mussa, IMF's former Chief Economist. Even Alan Greenspan, the former US Federal Reserve Chairman, has expressed shock and disbelief at the extent and the speech at which the crisis has grown.

The Bank for International Settlements, which groups the world's central banks, and the Paris-based Organization for Economic Cooperation and Development did not fully realize the gravity of the situation either.

"The explosion of the crisis, particularly in the past few weeks, is something that was not anticipated by anyone in official circles," Mr Mussa says, according to a BBC report.

As the unprecedented credit crunch hits even the countries with a good record of managing their economies, the IMF is considering urgent measures and reforms to rapidly respond to the developing crisis. According to the Associated Press, among the ideas under discussion is to provide a credit line in hard currency to countries that otherwise would have no access to foreign capital.

The IMF's 24-member executive board is expected to meet next week to examine the various proposals under consideration.

The immediate beneficiaries would be developing nations with good economic track records such as Turkey, Brazil and South Korea that normally have no difficulty borrowing but have seen access to money dry up as Western banks simply stopped lending.

Another idea under consideration is to let member countries borrow against the amount they have contributed to the fund, known as a quota. For example, if South Korea borrowed against its quota, it could obtain almost $22 billion.

The IMF already is discussing loan packages with close to a dozen countries and is examining ways to speed up the process in line with instructions it received this month from its policymaking committee.

IMF loans often serve as an incentive to other lenders, generating other financing from private and public sources such as the multilateral development banks.

The loans also come with stringent conditions that involve budget cutting and other belt-tightening measures that some governments have said should be eased in the current crisis. Many developing nations and NGOs have criticized the IMF for its insistence on cuts that hurt the poor the most. IMF supporters counter that the developing nations require close IMF supervision because they have not been good stewards of their economies.

A case in point is Pakistan. It has just returned to ask for IMF's help after a break of several years when its economy was considered one of the fastest growing in the world. But times are different now. The country's economy is in freefall. Inflation is running at about 30%. The rupee has devalued by about 25% in just three months. The fiscal deficit is a whopping 10% of GDP. Foreign-exchange reserves cover just six weeks of imports. A $500m Eurobond matures next February, but the market has already decided it is junk. The country needs at least $3 billion immediately, and a further $10 billion over the next two years to plug a balance-of-payments gap. Without it, default abroad might well coincide with political anarchy at home.

In the first loan made in the current global economic turmoil, Iceland and the IMF tentatively agreed to a $2 billion loan over two years in response to the collapse of the country's banking system.

The government said the deal, which still must be approved by the IMF's board in Washington, also will give Iceland immediate access to $830 million to head off the financial threat to its entire economy.

The IMF has helped several troubled developing economies earlier this decade. IMF was also very active during the Asian financial crisis of 1997-98. In the current financial crisis, Iceland became the first Western country to borrow from the IMF since Britain in 1976.

Other countries thought to be close to reaching a loan agreement with the IMF include Hungary, Ukraine and Pakistan, even though Pakistani government publicly denies it.

The head of the IMF, Dominique Strauss-Kahn, said this month that the fund has more than $200 billion available for bail out and could obtain additional resources quickly if needed. The consensus among the experts is that IMF will need a lot more than $200 billion as the list of countries lining up for IMF help grows longer by the day, including non-traditional borrowers such as Iceland.

Wednesday, March 3, 2010

Pakistan's Economic Performance 2008-2010

Guest Post By Prof. Ashfaque Hasan Khan

This post briefly reviews two years of economic performance of the present government. What it inherited, what it informed the IMF and the people of Pakistan, why it went to the IMF, and where we stand now - are the subject matter of this article.

Pakistan positioned itself as one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and most importantly, taking Pakistan out of the IMF Program.

These facts were acknowledged by the present government in a Memorandum of Economic and Financial Policies (MEFP) for 2008/09-2009/10, while signing agreement with the IMF on November 20, 2008. The document clearly (but grudgingly) acknowledged that "Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07". It further acknowledged that "the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para 1)

Per Capita PPP GDP

A cursory look at the above stated acknowledgment is sufficient to see that the government deliberately misguided the people of Pakistan by presenting a totally distorted picture of the economy. While it could misguide the people of Pakistan for domestic political consumption, it had no option but to tell the truth to the international financial institutions as these facts were known to them.

Even the government did not inform the people of Pakistan that it obtained the IMF Program on the basis of past performance. Pakistan received the extra-ordinary funding from the IMF under the fast-track Emergency Financing Mechanism which was meant for the countries "that have a strong track record of sound policies, access to capital markets and sustainable debt burdens but need rapid help to overcome financial crisis". (IMF Survey, October 29, 2008) Thus, a government which starts its inning on distortion can never bring stability in the economy. Most of its time and energy would be consumed for covering up of its failure.

The present government inherited a relatively sound economy on March 31, 2008. It inherited foreign exchange reserves of $13.3 billion, exchange rate at Rs62.76 per US dollar, the KSE index at 15,125 with market capitalization at $74 billion, inflation at 20.6 per cent and the country's debt burden on a declining path. The government itself acknowledged in the same document that "the macroeconomic situation deteriorated significantly in 2007/08 and the first four months of 2008/09 owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and policy inaction during the political transition to the new government". (Para 3 of the MEFP, November 20, 2008)

What went wrong? Why one of the fastest growing economies in the Asian region until two years ago has been totally forgotten in the region? Firstly, the speed and dimension of exogenous price shocks (oil and food) were of extraordinary proportions. Secondly, the present government found itself totally ill-prepared and clueless in addressing the challenges arising out of the shocks. While rest of the world was taking corrective measures and adjusting to higher food and fuel prices, Pakistan lurched from one crisis to another.

Despite peaceful election and a smooth transition to a new government, political instability persisted. For a protracted period there were no finance, commerce, petroleum and natural resources and health ministers in the country. The government lost six precious months in finding its feet. It gave the impression of having little sense of direction and purpose. A crisis of confidence intensified as investors and development partners started to walk away. The stock market nosedived, capital flight set in, foreign exchange reserves plummeted and the Pakistani rupee lost one-third of its value. In short, Pakistan's macroeconomic vulnerability had grown unbearable. It had no option but to return to the IMF for a bailout package. There were no Plan A, B and C. There was only one plan, that is, to return to the IMF.

While the country was moving rapidly towards the IMF, the ministry of finance had prepared the plan to bring $4 billion by June 30, 2008 through four transactions. A kick-off meeting was scheduled on April 23, 2008 at the ministry to give a final touch to the various roadshows. These transactions were canceled on April 20, 2008. Who ordered the cancellation of $4 billion transaction? This cancellation prompted balance of payment crisis and the rest became history.

The economy continues to remain in intensive care unit and is breathing thanks to the injections from the IMF, World Bank and Asian Development Bank. The economy is not on the radar screen of the government and as such the economic managers have no relevance in the current political set up. The exit of Shaukat Tarin is a classic example. At least he tried his level best to inject financial discipline but paid the price of teaching prudent financial management. No matter who replaces Shaukat Tarin, the economy would continue to lurch from one crisis to another until and unless the government brings the economy at the center stage.

Dr. Ashfaque Hasan Khan is the Dean of Business School at the National University of Science and Technology in Islamabad, Pakistan.

Riaz Haq's Comments: In rural Pakistan where about 60% of Pakistanis live, people spend 55% of their income on food, according to a World Resources Institute (WRI) report.

The bottom two BOP (Base of Income Pyramid) groups alone account for more than 50% of national food spending in Pakistan. Average annual food spending per household in the BOP in Pakistan is $2,643. While BOP3000 households have 6 times as much income on average, they outspend BOP500 households in the food market by a ratio of only 2:1 in Cameroon, 2.3:1 in South Africa and Pakistan, 2.4:1 in Kazakhstan, 1.9:1 in Uzbekistan, and 3:1 in Peru.

Currently, food inflation in Pakistan is running at 15.49 percent, hitting the poor the hardest.

Here's a video clip of British Writer William Dalrymple speaking about Pakistan at a recent Intelligence Squared debate:

Here is a recent video clip of former President Muharraf talking about the power crisis in Pakistan:

Saturday, September 17, 2011

Pakistan to Terminate IMF Bailout Early

Citing significant improvements in Pakistan's current account balance, Pakistan's Finance Minister Dr Abdul Hafeez Shaikh has said that his government would not waste its energy on reviving the currently suspended IMF program that began in 2008, or seek a new IMF bailout, according to a report in Pakistan's Dawn newspaper.

Pakistan's decision follows the latest State Bank report of a current account surplus equivalent to 604 Million USD in the second quarter of 2011.

The surplus is the result of rising exports from Pakistan and growing remittances from Pakistani diaspora, the 7th largest in the world.

Pakistan's exports in the first two months of the current fiscal year (2011-12) surged by 20.26 percent over the corresponding period of last year. Exports during July-August (2011-12) were $4,167 million as compared to the exports of 3,465 million during July- August (2010-11, according to a GeoTV report citing data from Federal Bureau of Statistics (FBS).

According to official data as reported by Reuters, remittances rose 40.45 percent to $1.31 billion in August 2011, compared with $933.06 million in the same period last year.

Pakistan has about $18 billion in foreign exchange reserves, according to Dawn News. It's about 6 months worth of imports at the current rate.

Currency traders reacted negatively to the government's decision to part ways with the IMF as the Pakistani rupee hit its second record low against the dollar in two days on Friday, touching 87.92 before firming to 87.75/78 at the close.

Some analysts believe that the timing of the decision to free itself from the IMF is motivated by the ruling party's desire for more spending on populist programs to impress its voters before the coming elections. This is likely to make the budget deficits worse in the absence of IMF's demands for reforms to cut spending and raise revenues to narrow Pakistan's budget deficits to 4.5% of GDP.

Related Links:

Haq's Musings

Pakistani Diaspora Among the World's Largest

Pakistan's Rising Exports and Remittances

Pakistan Car Sales Up 61%

Pakistan to Swallow IMF's Bitter Medicine

IMF and Pakistan- A Case Study

Pakistan's Economic Performance 2008-2010

Wednesday, February 24, 2010

Pakistan's Finance Chief Shaukat Tarin Quits

Pakistan's finance minister Mr. Shaukat Tarin has resigned. Tarin is an accomplished banker and a protege of former Prime Minister Shaukat Aziz. He became Pakistan's finance minister in October 2008 when the nation's economy was on the brink of collapse. He led the negotiations with the International Monetary Fund for a 23-month, US $7.6 billion bailout package that boosted Pakistan's foreign-exchange reserves and helped avert a sovereign default.

There have been rumors that the ruling PPP politicians, particularly President Zardari and his inner circle, have ignored Tarin's key recommendations to address the acute power shortages in the country. Zardari's insistence on pushing rental power projects, rather than fix the huge circular debt problem in the energy sector first, specially frustrated the outgoing finance chief, when he reportedly threatened to quit last year.

In spite of the obstacles Tarin faced in his job, he has managed to stabilize the economy. International credit rating agencies Moody's and Standard and Poor both raised Pakistan's credit rating and outlook last year as reported by Bloomberg News.

S&P increased its rating on Pakistan’s long-term sovereign debt to B- from CCC+, six levels below investment grade and the same ranking as the Ukraine and Argentina. The outlook was maintained as stable.

“The upgrade reflects Pakistan’s improved external liquidity position, coupled with its successes in implementing corrective policy measures to rectify an unsustainable fiscal trajectory,” S&P said in a statement. “A narrowing current account deficit, helped by buoyant remittance inflows, and successive disbursals of the IMF and other multilateral loans have reduced the risk of near-term external payment difficulties for Pakistan,” S&P added in its statement last year.

Tarin recently said that Pakistan's economy may grow by at least 3.4%--faster than previously estimated--driven by a likely rebound in its manufacturing sector.

"The economy has started showing signs of recovery, but more work is needed on structural reforms," Tarin was reported as saying by the media.

The manufacturing sector, which makes up 25% of GDP, is now forecast to expand 5.5% this fiscal year ending in June, 2010, after having contracted by a similar margin last year, Tarin said. However, federal finances will be strained due to higher military expenditure and subsidies on electricity, he added.

As a result of investor confidence in Mr. Tarin's economic leadership, Pakistan's KSE-100 stock index surged 55% in 2009 in US dollar terms and 65% in rupee terms, in a year that also saw the South Asian nation wracked by increased violence and its state institutions described by various media talking heads as being on the verge of collapse.

Media reports have recently quoted Mr. Tarin as saying the government plans to meet investors in March to raise between $500 million and $1 billion in the last quarter of the current fiscal year, ending on June 30.

Here's the latest IMF assessment of Pakistan's economy on Tarin's watch, as reported by a private news channel Geo TV:

Pakistan’s economic growth has started recovering despite security and energy challenges and the country met almost all targets under the International Monetary Fund program, the global financial institution said Tuesday.

“Pakistan’s program is progressing well,” the Fund said in a statement following “constructive discussions” with Pakistani officials focusing on Pakistan’s recent economic performance, the outlook for the rest of the fiscal year.

Adnan Mazarei, who met with the Pakistani officials in Dubai over the past week to initiate discussions on the fourth review under Pakistan’s Stand-By Arrangement (SBA), noted that Islamabad observed all quantitative performance criteria for end-December 2009, except for the budget deficit target, which was exceeded by a small margin.

Listing positive trends Pakistan registered in recent months, the Fund said the exchange rate has remained stable at Rs. 84–85 per U.S. dollar and the international reserves position has strengthened (the banking system’s gross foreign exchange reserves, including the State Bank and commercial banks, reached US$14.3 billion in mid-February, of this total the State Bank held US$10.5 billion).

The early signs of recovery in some sectors and the improved external position are encouraging, although there are risks and challenges to Pakistan’s economic program.

“Economic growth in Pakistan is starting to recover; large-scale manufacturing output has started to increase, the improvement in the global economy has helped manufacturing exports, and private sector credit growth has picked up somewhat as businesses rebuild their working capital.”

The IMF’s package for Pakistan - approved in November 2008-has been extended to $11.3 billion.

Looking ahead, the IMF statement said, a resumption of higher growth is needed to raise living standards and will require improvements in the business climate to stimulate higher investment by local and foreign investors.

The financial institution also noted that the “resolve of the Pakistani authorities to implement their stabilization and reform program is a key factor in deepening macroeconomic stabilization, despite the risks associated with internal security and uncertainty as to the pace of global economic recovery.”

Emphasizing the need for stepped up donors support for the key anti-terror partner of the international community, the Fund said early disbursement of donor financing remains crucial to support Pakistan’s stabilization and reform efforts and laying the basis for a high and sustainable growth.

The IMF mission staff will prepare a report on the fourth review under Pakistan’s SBA that is scheduled for consideration by the IMF Executive Board in late March.

Pakistan should be able to attract financing from abroad "to the extent that they can demonstrate that there has been progress on these three fronts: growth; stand-alone external liquidity; and quality and size of budgetary revenues," Aninda Mitra, a vice president at Moody's, told the Wall Street Journal.

Mitra said if Pakistan's economic growth could return to a range of around 4%-5% "sooner than later without generating macroeconomic imbalances or inflationary pressure, that will be a pretty notable outcome."

It is also important for Pakistan to be able to enjoy sufficient external liquidity without depending on further contingent support from external official sources and for it to manage long-term budgetary pressures, he said.

Financial markets appeared to take news of Mr. Tarin's departure in stride.

Pakistan's dollar-denominated bonds and the costs of insuring against a default or restructuring of its debt were steady Wednesday. Its five-year credit default swap was last quoted at 1,112 basis points, or hundredths of a percentage point, on the bid side while its bonds were hardly traded. With holders of Pakistan's bonds mostly buy-and-hold investors, and given the small size of outstanding issues, trading volume tends to be relatively low.

Wall Street Journal says Pakistan's fiscal improvement has stalled recently mainly due to unforeseen factors such as the delays in the receipt of pledged aid from friendly countries as well as the conflict in the northwestern part of the country and resulting delay in military reimbursement from the U.S.

"The government has had to issue debt to finance such shortfalls," Mr. Mitra said. "We don't think that these are permanent or deep setbacks for the fiscal situation regardless of the transition" of leadership at the finance ministry, he added.

Media reports indicate front-runners to succeed Tarin include Nasim Beg, CEO of Arif Habib Investments Ltd.; Planning Minister Makhdoom Shahab-ud-Din; and Junior Minister for Economic Affairs Hina Rabbani Khar, who presented the 2009-10 budget in parliament last year.

Although IMF is closely watching Pakistan's economic management for now, I believe it is still very important for the next finance minister to be persuasive, and display sufficient independence from the political leadership in managing the nation's economy as a professional.

Related Links:

US Fears Aid Will Feed Graft in Pakistan

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Pakistan's Energy Crisis

Karachi Tops Mumbai in Stock Performance

Sunday, January 14, 2018

Pakistan Economy is the World's Third Fastest Growing Among Top 25 Economies

Pakistan is now the world's third fastest growing economy among the world's top 25 economies with PPP GDP of over one trillion US dollars, according to the International Monetary Fund (IMF). IMF has recently raised the country's 2018 growth forecast to 5.6%.

Courtesy: Ashraf Hameedi, Highforest Capital

Pakistan 3rd Fastest Among Top 25:

Spectator Index has ranked India first with 7.3% growth, followed by China (6.5%), Pakistan (5.6%), Indonesia (5.3%) and Turkey (3.7%) among the world's 25 largest economies in terms of PPP GDP.

Earlier in October 2017, the International Monetary Fund (IMF) forecast Pakistan's economy to grow at 6.3% CAGR over 2017-2022.

World Bank:

The World Bank sees Pakistan's GDP to grow 5.5% in current fiscal year 2017-18 ending in June 2018, a full percentage point faster than the 4.5% average GDP growth for Emerging and Developing Economies (EMDEs) that include Argentina, Brazil, China, India, Nigeria and Russia among others. However, Pakistan economic growth continues to lag growth forecast for regional economies of India and Bangladesh. The report also highlights the issue to growing trade deficit and current account gap that could lead to yet another balance of payments crisis for Pakistan requiring another IMF bailout.

Source: World Bank Group

Pakistan GDP Growth:

Here's an excerpt of the January 2018 World Bank report titled "Global Economic Prospects" as it relates to Pakistan:

"In Pakistan, growth continued to accelerate in FY2016/17 (July-June) to 5.3 percent, somewhat below the government’s target of 5.7 percent as industrial sector growth was slower than expected. Activity was strong in construction and services, and there was a recovery in agricultural production with a return of normal monsoon rains. In the first half of FY2017/18, activity has continued to expand, driven by robust domestic demand supported by strong credit growth and investment projects related to the China-Pakistan Economic Corridor. Meanwhile, the current account deficit widened to 4.1 percent of GDP compared to 1.7 percent last year, amid weak exports and buoyant imports."

Growing External Account Imbalance:

The report correctly points out the problem of growing current account deficit that could turn into a balance of payments crisis unless the trade deficits are brought under control. Recent trends in the last three months do offer some hope with December 2017 exports up 15% while imports increased 10%. Exports in November increased 12.3%.

Along with double digit increase in exports in the last two months, Pakistan received remittances amounting to $1.724 billion in December 2017, 8.72% higher compared with $1.585 billion the country received in the same month of the previous year, according to data released by the State Bank of Pakistan (SBP), as reported by Express Tribune.

Summary:

Pakistan is the third fastest growing economy among the top 25 economies in terms of purchasing power parity. Pakistan's economic growth is continuing to accelerate amid rising rising investments led by China-Pakistan Economic Corridor related infrastructure and energy related projects. The IMF sees Pakistan economy growing at 5.6% while the World Bank forecasts it to grow by 5.5% in current fiscal year 2017-18 ending in June 2018, a full percentage point faster than the 4.5% average GDP growth for Emerging and Developing Economies (EMDEs) that include Argentina, Brazil, China, India, Nigeria and Russia among others. However, Pakistan economic growth continues to lag growth forecast for regional economies of India and Bangladesh. The report also calls attention to the expanding current account gap as a matter of concern that must be taken seriously by the government to avoid yet another return to the International Monetary Fund (IMF).

Related Links:

Haq's Musings

CPEC is Transforming Least Developed Parts of Pakistan

Per Capita Income in "Failed State" of Pakistan Rose 22% in 5 Years

Credit Suisse Wealth Report 2017

Pakistan Translates GDP Growth to Citizens' Well-being

Rising Motorcycle Sales in Pakistan

Depth of Deprivation in India

Chicken vs Daal in Pakistan

China Pakistan Economic Corridor

ADB Raises Pakistan GDP Growth Forecast

Sunday, January 25, 2026

Independent Economists Expose Modi's Fake GDP

Ruling politicians in New Delhi continue to hype their country's economic growth even as the Indian currency hits new lows against the US dollar, corporate profits fall, electrical power demand slows, domestic savings and investment rates decline and foreign capital flees Indian markets. The International Monetary Fund (IMF) has questioned India's GDP and independent economists Professors Arun Kumar and Ashoka Modi and investment banker Ruchir Sharma have detailed why the Indian official data can not be trusted. It seems that the BJP-led government of Prime Minister Narendra Modi is fast losing credibility by politicizing the civilian bureaucracy and the military brass to project their economic and military failures as successes.

IMF Gives C Grade to India's GDP Data

Beyond the disputed claim of being the "fourth largest economy", the Modi government's failure on the national health and wellness front is also getting more attention. “Air is unbreathable. Water is undrinkable. Food is adulterated. What’s the point of becoming the 4th largest economy?” asked India-American technology entrepreneur Sabeer Bhatia in an X message recently. Gita Gopnath, Harvard professor of economics, said at the World Economic Forum in Davos this week that the economic impact of pollution on India is more severe than the effects of tariffs imposed on the country. “About 1.7 million lives are lost every year in India because of pollution. That’s 18% of the total deaths in India,” Gopinath said, quoting a World Bank study. “Even from an international investor’s perspective … the pollution holds you back.”

Unsafe Drinking Water in India Claimed as 4th Largest Economy. Source: DownToEarth

An international badminton tournament in India has brought global spotlight on the lack of basic hygiene in India. Foreign players complained about dusty floors, dirty courts, bird droppings and unhygienic conditions at the India Open in New Delhi. “I think the floors are dirty. There is a lot of dirt on the courts. There’s bird excrement. There are birds flying around in the arena,” said 28 year-old Denmark women’s singles player Mia Blichfeldt. Andres Antonson, world number three badminton player, withdrew from the India Open Super 750 in New Delhi for the third consecutive year, choosing to pay a $5,000 fine. He cited "extreme" hazardous air pollution in Delhi as the reason for skipping the mandatory tournament, arguing it is not a safe place to hold the event.

The IMF has recently expressed doubts about Prime Minister Narendra Modi's BJP government's GDP data. It has particularly questioned the government's statistical methodologies, inflation measurement, and the estimates of the informal economy used in reporting the country's gross domestic product. Professor Arun Kumar of Jawaharlal Nehru University believes the IMF's concerns are valid. He thinks the real size of India's economy is only half of what is officially claimed. “The economy is almost 50% wrong – when the government says it’s $3.8 trillion, my estimate is it is probably still $2.5 trillion because we are overestimating the unorganized sector, which is actually declining. This is building up over a period of time,” Kumar told Indian journalist Karan Thapar.

In its recent assessment, the International Monetary Fund (IMF) has given a "C" grade to India's national accounts. In particular, the IMF has raised the issue of the government using 2011-12 as the base year as being outdated, the discrepancy between production and consumption data and the use of Wholesale Price Index, and not a Producer Price Index, to deflate many economic activities to derive real GDP from nominal GDP.

Indian Firms Falling Corporate Profits. Source: Bloomberg

Corporate profits of Indian firms are growing at a much slower pace than the 8.2% GDP growth in its most recent quarter. Net income for Nifty 50 Index firms likely rose 1.1% in the three months through Dec. 31 from a year earlier, according to analyst estimates compiled by Bloomberg. That would be the slowest pace in five quarters, weighed down by deteriorating margins for banks. Falling profits and declining currency are causing foreign capital to flee Indian markets. Foreign Portfolio Investors (FPIs) pulled out over $20 billion from Indian equities in 2025, marking a severe, sustained withdrawal that has continued into 2026. Net Foreign Direct Investment (FDI) has seen consecutive monthly outflows, including $1.67 billion in October and $446 million in November 2025. Investment banker Ruchir Sharma wrote about it in a Financial Times op ed titled "India needs to import more capital and export fewer workers". Ruchir wrote: "Most strikingly, corporate revenue normally grows (or shrinks) with the economy — in any country. But last year corporate revenue growth for listed companies in India decelerated to barely half the GDP growth rate"

Falling Indian Rupee. Source: Reuters

The source of the biggest error is the way India estimates the informal economy which, including agriculture, accounts for almost 45% of GDP. To do so, India uses the formal sector as a proxy to estimate the performance of the informal sector. But if the two sectors are moving in opposite directions, as has happened after demonetization, GST imposition and the pandemic, you could end up overestimating the unorganized sector.

Indian-American economist Ashoka Mody, author of "India is Broken", has argued that the current unemployment crisis in India is a direct result of the destruction of the informal sector, particularly the mom and pop stores that employed a large number of Indians.

Questions about the veracity of India's official GDP figures are not new. These have been raised by many top economists. For example, French economist Thomas Piketty argues in his best seller "Capital in the Twenty-First Century that the GDP growth rates of India and China are exaggerated. Picketty writes as follows:

"Note, too, that the very high official growth figures for developing countries (especially India and China) over the past few decades are based almost exclusively on production statistics. If one tries to measure income growth by using household survey data, it is often quite difficult to identify the reported rates of macroeconomic growth: Indian and Chinese incomes are certainly increasing rapidly, but not as rapidly as one would infer from official growth statistics. This paradox-sometimes referred to as the "black hole" of growth-is obviously problematic. It may be due to the overestimation of the growth of output (there are many bureaucratic incentives for doing so), or perhaps the underestimation of income growth (households have their own flaws)), or most likely both. In particular, the missing income may be explained by the possibility that a disproportionate share of the growth in output has gone to the most highly remunerated individuals, whose incomes are not always captured in the tax data." "In the case of India, it is possible to estimate (using tax return data) that the increase in the upper centile's share of national income explains between one-quarter and one-third of the "black hole" of growth between 1990 and 2000. "

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

Related Links:

Haq's Musings

South Asia Investor Review

Pakistan's Debt Crisis

Can Pakistan Avoid Recurring IMF Bailouts?

Pakistan is the 3rd Fastest Growing Trillion Dollar Economy

CPEC Financing: Is China Ripping Off Pakistan?

Information Tech Jobs Moving From India to Pakistan

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

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Riaz Haq's YouTube Channel

PakAlumni Social Network

Monday, March 16, 2026

Modi's Ex Chief Economic Advisor: India's Economy is 22% to 31% Smaller Than Official Claim

New research by several economists, including India's former Chief Economic Adviser Arvind Subramanian, finds that the country's GDP has been overstated by 22% to 31%. It says: "The level of (India's) real GDP is overstated by about 22% and the level of consumption by about 31%". "India's economy is thus smaller and the average standard of living significantly lower than official estimates indicate", it adds. The current GDP of India is less than $3 trillion, according to the authors.

Indian GDP Overstated by 22% to 31%. Source: PIIE

In a paper published by Peterson Institute for International Economics, the authors state that "India’s annual economic growth during the boom years between 2005 and 2011 may have been underestimated by about 1–1½ percentage points on average, and subsequent growth between 2012 and 2023 may have been overestimated by about 1½-2 percentage points". It means that India's actual annual GDP growth during Prime Minister Modi's government has been closer to 4%, not 6% as officially claimed. Pakistan's GDP growth rate has been about 3.5% during this period.

The authors explain that the estimation error is caused by two methodological issues. The first issue leading to the misestimation is that the economy’s formal sector has been used as a proxy for the vast informal sector, even though the latter was disproportionately hit after 2015 by demonetization, the introduction of the goods and services tax, and the COVID-19 pandemic. The second issue causing misestimation is that the deflators for many sectors have been based on commodity prices, which have moved sharply relative to others.

IMF Gives C Grade to India's GDP Data

Unsafe Drinking Water in India Claimed as 4th Largest Economy. Source: DownToEarth

Indian Firms Falling Corporate Profits. Source: Bloomberg

Falling Indian Rupee. Source: Reuters