Written By: Dr. Farrukh Saleem
How do we keep a pulse on the economy? How does one evaluate the real health of an economy? Broadly speaking, an economy can be divided up into the internal sector and the external sector. Economic indicators are then used to ascertain or judge the current or future health of the economy. Here’s a review of our economy’s external sector based on exports, foreign direct investment, foreign exchange remittances and external debt.
Exports: Pakistan’s exports as a percent of our GDP are at a 25-year low. In 1992, our exports stood at 17 percent of our GDP while the same now stand at 7 percent; what a steep fall! In dollar terms, our exports have come down from $25 billion just five years ago to a current figure of around $20 billion; a steep fall of around 20 percent in just five years. Amazingly, Bangladesh’s exports over the same five – year period have grown from $24 billion to $35 billion – a 45 percent jump.
In 1991, Pakistan’s share in world exports stood at 0.18 percent which has since come down to 0.14 percent. In 2004, Pakistan’s trade balance as a percent of our GDP stood at [plus] 1 percent of GDP; the current trade balance is [minus] 7 percent of GDP. As far as the trade balance is concerned, the year 1985 was even worse but the deterioration over the past thirteen years is a serious matter.
Foreign Direct Investment (FDI): In 2007, Pakistan attracted $5.59 billion FDI. The current figure on FDI is around a billion dollars – 80 percent drop in ten years. In 1996, our share in world FDI stood at 0.26 percent which has since come down to a paltry 0.12 percent of world FDI – 55 percent drop.
Imagine; in 1960, we were 1.5 percent of world population and now we are 2.56 percent of world population while our share in world exports is shrinking and our share in world FDI is also on its way down. To be certain, we are missing the boat.
Imagine; five years ago our labor force numbered 61 million which now numbers nearly 70 million but our exports have gone down from $25 billion to $20 billion over the same period. Aren’t we missing the boat?
Remittances: Pakistani workers sending back their hard-earned dollars back to Pakistan have been and continue to be the backbone of our external sector. A year ago, Pakistanis sent back a colossal $20 billion back to Pakistan and that covered around 40 percent of our import bill. Of the $20 billion roughly 65 percent comes from five countries: Saudi Arabia, the UAE, Kuwait, Qatar and Oman.
Foreign workers from all over the world working in Saudi Arabia, the United Arab Emirates, Kuwait, Qatar and Oman have been remitting back a wholesome $100 billion a year to their home countries. No more (courtesy of the oil price crash).
For Pakistan, Saudi Arabia is the source of 30 percent of our workers’ remittances and Saudi Arabia’s budgetary deficit has now ballooned to $100 billion. Saudi Binladin Group, the construction giant, has already laid-off 50,000 of its 200,000 workforce. For Pakistan, remittances from Saudi Arabia, the U.S. and the UK are down 6.2 percent, 6.9 percent and 8.5 percent, respectively.
External Debt: This is the portion of our national debt that has been “borrowed from foreign lenders including commercial banks, governments or international financial institutions. These loans, including interest, must be paid in the currency in which the loan was made.”
Over the past three years, additional loans to the amount of $25 billion from foreign lenders have been taken. Of the $25 billion, an amount of roughly $12 billion went back towards the payment of previous loans. Net foreign borrowing thus amounted to $13 billion (in addition to domestic borrowings of over Rs. 3 trillion).
The economy seems headed into a ‘debt trap’ whereby we must borrow more just to pay back what has been borrowed in the past. In 2016, state-backed Chinese banks rescued us by lending $900 million. In the first three months of 2017, we borrowed an additional $300 million from the Chinese (Pakistan’s trade deficit with China has doubled over the past few years).
Pakistan is now seeking an additional $600 million from the Asian Development Bank (ADB) in the name of Public Sector Enterprises Reforms Tranche-II and III. Pakistan is now seeking an additional loan of $100 million from the French Development Agency (AFD). Pakistan is also seeking an additional loan of $750 million on commercial terms from China for Pakistan to pay back a $750 million, 10-year Eurobond that was floated back in 2007 (and is maturing this year).
In 1971, our total debt (external plus internal) stood at Rs. 30 billion. In a matter of 46 years our public debt has moved from Rs. 30 billion to Rs. 22,000 billion.
In 2008, the per capita debt – debt owed by each man, woman and child in the country – stood at Rs. 40,000. The same has since gone up to Rs. 115,000.
The truth is that our exports have now become uncompetitive in the world market because input costs in Pakistan – electricity and natural gas – are now the highest in the region. Additionally, the cost of doing business in Pakistan is now the highest in the region and our rupee has become grossly overvalued. Our return back to another IMF rescue is inevitable. Pending things for elections is not leadership but expediency.
Lo and behold, we refuse to accept that our external sector is in deep trouble. As a consequence of the refusal, there’s no policy to turn things around; one must first recognize that there’s a problem for problem solving to begin.
The writer is an eminent analyst who regularly contributes for national and international print and electronic media.