Unprecedented surge in Pakistan’s national debt during last 5 years

By Usman Ahmed

Pakistan’s Public debt-to-GDP ratio mounted to 62.6 percent during Financial Year 2012 (FY12) and country’s total public debt now stands at Rs 12.9 trillion, according to annual report issued by the State Bank of Pakistan (SBP), which is more than double of the total national debt recorded in 2008 .

As of June 30, 2008, Pakistan’s total public debt stood at slightly over Rs 6 trillion, but, during its five-year tenure, the Pakistan Peoples Party (PPP)-led government has added Rs 6.9 trillion to the total debt stock, which means the incumbent government’s five-year borrowings are more than double of the country’s 61 years borrowings.

According to the Fiscal Responsibility and Debt Limitation Act of 2005, total debt should not exceed 60% of country’s Gross Domestic Product (GDP). The International Monetary Fund (IMF), However, believes even this threshold is too high. It suggests that developing countries like Pakistan must take their debt much below 60% of GDP to overcome hurdles standing in the way of venturing into world capital markets.

According to state bank, surge in public debt was due to a large fiscal deficit, increased government borrowings and exchange losses stemming from the depreciation of the Pak Rupee.

“Most of the increase in public debt was contributed by domestic debt: its share has increased from 54.7 percent in FY11, to 59.1 percent in FY12.  On the other hand, the stock of public external debt has declined by US$ 2 billion due to repayments to the IMF and currency revaluation impact.  However, in Rupee terms, this stock has increased due to the depreciation of Pak Rupee against US Dollar in FY12,” the central bank said in its annual report. “These debt dynamics indicate that Pakistan could move into a debt trap”

Stepping back, Pakistan’s external debt vulnerability has also increased during FY12; as in the absence of sufficient external inflows, the repayment burden of external debt (along with the financing of current account deficit) fell on the country’s foreign reserves. This resulted in downgrading of Pakistan’s sovereign credit rating to its lowest level, Caa1, by Moody’s in July 2012.

Furthermore, a regional comparison of Pakistan’s external debt also highlights the same dismal situation. According to the Global Development Finance 2012, Pakistan’s external debt is higher than the average South Asian and developing economies.

The state bank warns that a country cannot continue increasing its debt stock without a commensurate increase in its repayment capacity. Global experience shows that failing to adhere to this simple principle, has led to several episodes of defaults, on both external and domestic debts. To overcome the ongoing challenges to the macroeconomic stability of the country, SBP emphasizes the need for fiscal consolidation.

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Beijing’s control on Pakistan’s strategic Gwadar port irks US, India

By Usman Ahmed

The Prime Minister of Pakistan, Raja Pervaiz Ashraf, during the cabinet meeting on Wednesday, gave formal approval to a deal transferring the management of strategically located Gwadar port on the Arabian Sea, from Singapore to China.

The Gwadar Port in Pakistan’s southwestern Balochistan province is situated between South Asia, Central Asia and the Middle East. It is near the Pak-Iran border and strategic Strait of Hormuz, the gateway for about 20 percent of the world’s oil. It is also the nearest warm-water deep-sea port to the landlocked but energy-rich Central Asian republics as well as Afghanistan.

China, which has long been seeking an alternative to the Strait of Malacca, through which over 80 percent of China’s imported oil passes, financed 75 percent of the initial development cost of $248 million for Gwadar Port. To China, the port could be a conduit for energy flows into northwestern China, by transporting oil and gas from the port through pipelines that traverse Balochistan and the federal agencies to feed into China’s Xinjiang province. As China’s oil imports increase, it would prefer to insulate its energy flows from the turbulent waters of the Straits of Malacca and the South China Sea. Indian ships among others patrol the former as an anti-piracy measure. In the latter, China is involved in a territorial dispute with Vietnam and Philippines among others. In a conflict, it would be easy to shut off China’s energy supplies. But not if they can be routed through Gwadar where Pakistan Navy can also add to the security.

According to recent figures, over 60% of China’s imported oil travels through the Straits of Hormuz. Having Gwadar under its command would change the security dynamics for China. As China moves into the Indian Ocean, Gwadar port would be ideal as a staging ground for Chinese ships. China already has a steady presence in Sri Lanka’s Hambantota port, it is wooing Maldives, though no port presence is planned yet. China is also building a port in Chittagong, Bangladesh, as well as Sonadiya, near Cox’s Bazar.

The Gwadar port is currently being operated by Singapore’s PSA International, but needs further development work to become fully operational. According to PSA’s Gwadar website, there has been no ship in the port since November.

Pakistan’s Information Minister Qamar Zaman Kaira said Singapore’s PSA International could not develop or operate Gwadar “as desired” and hoped that under the new management the strategically located deep-sea port would soon contribute to Pakistan’s flagging economy. “The Chinese will make more investment to make the project operational,” Kaira said.

Responding to this major development, Chinese foreign ministry spokesman Hong Lei said on Thursday that Chinese companies have been actively involved in Pakistan’s foreign cooperation projects and China will always support projects conducive to China-Pakistan bilateral friendship and Pakistan’s development and prosperity.

Taking over Gwadar operations means that Beijing would be undertaking the biggest infrastructure project in Pakistan after it Karakorram Highway road project connecting the two countries in 1976.  China will be stepping into the port located at the entrance of the Persian Gulf about 75 km east of Pakistan’s border with Iran. It also evoked apprehensions among the Indian strategic community in India as it is in the proximity of Mumbai’s port.  China recently said it would construct another 20 berths at Gwadar if it was given the rights to operate the port. Beijing has been working to develop a string of harbours in the Indian Ocean and Arabian Sea, a region traditionally considered an Indian backyard.

Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, said he believed that the injection of Chinese investment could soon vitalize the port with strategic importance.

“The Singapore company put more value in the commercial benefits in operating the port, but for China, its strategic values is greater than the commercial significance,” Lin said. “I do believe China will build the port at the astonishing ‘Chinese speed’ to materialize the port’s strategic values.”

Wang Weihua, a researcher on South Asia at the Shanghai Institutes for International Studies, said the Gwadar project as a port, and not as a naval base, may provide supplies for Chinese merchant ships and escort vessels, as well as serving China’s energy interests in the Middle East. He said that the transfer of the port management does not represent a threat to any country. Meanwhile, Chinese investment can help Islamabad to better develop the Baluchistan province and help boost Islamabad’s influence in the Muslim world, said Wang.

Liu Xiaoxue, a researcher on South Asia at the Chinese Academy of Social Sciences, said the port can stimulate the development of the bilateral free trade agreement, which was signed in 2006 but has not achieved as much as Islamabad expected.

“Still, it’s a little early to talk about the energy corridor as the cost of land energy transportation and risk of insecurity is still higher than maritime transportation,” Liu said.

According to defence and strategic analysts, China wants to use the port for commercial and defence purposes, which will undermine US influence in the Arabian Sea, who is already concerned about Beijing’s expanding regional influence.

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Economic crisis: Pakistanis spent Rs67.607b on mobiles, tea, cars

By Usman Ahmed

Despite poor economic conditions in the country, Pakistanis used mobile phones, tea and motorcars worth Rs32.962 billion, Rs17.454 billion, and Rs17.191 billion, respectively, during the first six months of the current fiscal year (2012-2013), according to the Pakistan Bureau of Statistics (PBS).

The PBS figures revealed that the country imported food stuff worth $2.157 billion during the first half (July-December) of the year 2012-13. The break-up of $2.157 billion revealed that import bill of milk products was up by 3.20 per cent, dry fruits and nuts 1.02 percent, import of tea increased by 6.46 percent, import of spices decreased by 30.06 percent, soyabean oil’s imports went up by 26.47 percent, palm oil import decreased by 18.92 percent, sugar import declined by 78 percent, import of pulses went down by 12.76 percent and import of all other food items decreased by 24.80 percent during the period under review.

Meanwhile, according to PBS figures, the country imported machinery worth of $2.907 billion. Transport group imports stood at $951 million, textile group $1.115 billion, agricultural and other chemicals $3.136 billion, metal group $1.529 billion, miscellaneous group imports were recorded at $402 million and all other items imports remained $2.026 billion during July-December period of 2012-13 against July-December period of 2011-12. It is worth mentioning here that Pakistan’s overall imports were recorded to $21.922 billion in July-December period of ongoing financial year as compared to $22.678 billion of the corresponding period last year.

The food exports of the country during first half of financial year 2012-13 increased by 4.82 percent as compared to same period of last year. The exports of overall food group were recorded at $2.054 million during July-December (2012-13) against the exports of $1.959 million during July-December (2011-12).

According to PBS data, the food exports from the country on month on month basis also increased by 14.34 percent and 18.01 percent during December 2012 when compared with December 2011 and November 2012, respectively. The food exports increased from $384.493 million in December 2011 and $374.465 million in November 2012 to $441.923 million in December 2012.

The major food items which recorded increase in their exports during the first six months of current financial year over same period of last year include sugar (100 percent), meat and meat preparations (43.74 percent), fish and fish preparations (2.64 percent), vegetables (38.28 percent), spices (25.07 percent), oil seeds, nuts and kernels (41.6 percent) and all other food items (17.31 percent).

Similarly the food items which recorded decrease in their exports include rice (12.33 percent), fruits (1.77 percent), pulses (56.68 percent), tobacco (40.91 percent) and wheat (61.49 percent). The overall exports from the country witnessed growth of 7.58 percent during the period July-December (2012-13) as compared to same period of last year. Exports from the country during July-December (2012-13) were recorded at $12.0513 billion against the exports of US$ 11.201 billion during the same period of last year.

Pakistan unlikely to achieve growth targets set for FY2012-13

By Usman Ahmed

The latest reports issued by the International Monetary Fund (IMF) and World Bank have revealed that Pakistan would miss, for the fifth consecutive year, the growth targets set for the financial year 2012-13 and the sluggish pace of economy will continue for at least two more years with a rise in unemployment.

GDP forecast

According to the IMF, the economy will grow by mere 3.5 percent this year, as against official projections of 4.3 percent, whereas the Global Economic Prospects Report 2013, issued by the World Bank last week, says Pakistan’s economy is expected to grow at a rate of 3.8 percent, half percentage point below the target of 4.3 percent set for fiscal year 2012-13 ending on June 30.

Pakistan, the second largest economy in South Asia, is clubbed with Nepal that has the economic growth projection of 3.8 percent. Even Sri Lanka at 6.1 percent and Bangladesh at 5.8 percent are projected to hit growth rates far higher than that of Pakistan.

Various studies, both independent and official, suggest that Pakistan requires 7-8 percent annual growth to create job opportunities for its youth as the country has witnessed sluggish growth the last five years, leaving hundreds of thousands jobless every year.

Budget deficit forecast

According to the World Bank, against the government’s target of 4.7 percent, the budget deficit is expected to hover above 6 percent, a projection which is lower than the IMF forecast. According to the IMF assessment, this year’s budget deficit will remain around 7-7.5 percent of the GDP.

Tax collection

In December 2012, the Federal Board of Revenue (FBR) collected Rs211 billion revenue while Rs686 billion had been collected from July to November 2012. From July 1, 2012 to January 9, 2013, the provisional tax collection has come to around Rs915 billion, which is 22 percent higher than the revenue collection during the corresponding period of fiscal year 2011-12.

According to media reports, the Ministry of Finance expects to collect around Rs2.231 trillion against the annual tax collection projection of Rs2.381 trillion with likely shortfall of Rs150 billion during the current fiscal year.

Rupee depreciation

During the current week, the exchange rate started with Rs97.71/Rs97.76 for buying/selling a US dollar. As foreign currency reserves held by the State Bank of Pakistan are gradually declining, the Pakistani rupee may touch or even cross the record rate of Rs100 a dollar amid falling reserves, IMF loan repayment and political instability.

The World Bank has also warned that currencies of several oil importing countries with low or eroded reserve buffers, such as Egypt, Pakistan and India, remain vulnerable.

Trade deficit

According to the Pakistan Bureau of Statistics (PBS) figures, although the trade deficit decreased by 14 percent during the first half of the current fiscal year as exports expanded by 7.58 percent and imports witnessed a decrease by 3.33 percent. In the other words, the overall exports of the country increased from $11.202 billion in July-December 2011-12 to $12.051 billion during July-December 2012-13. On the other hand, the imports decreased from $22.678 billion during the corresponding period of the last year to $21.922 billion during the same period of the current fiscal year. Thus, the trade deficit during the first six months of current fiscal year stood at $9.871 billion against the deficit of $11.476 billion during the corresponding period of the last fiscal year, showing a decline by 13.99 percent.

Though industrial activity has started picking up, however, the World Bank says the inadequate electricity and gas supplies to the industry continue to affect the performance of the industrial sector. It fears that the increase in exports in the first five months of the current fiscal year with an increase in garments and processed cotton products’ export may not continue during the remaining part of the year. Electricity shortages during the second half of December have already adversely affected textile production and may dampen export growth in subsequent months.

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Industries relocating from China amid high labour cost

By Usman Ahmed

The ‘manufacturers’ relocation’ a phenomenon which was once experienced by the Europe, is now being witnessed in China, the second largest economy of the world, due to soaring labor costs.

The manufacturers are relocating completely or partially their businesses outside China particularly in Southeast Asian countries where wage rates are considerably lower.

“Rising wages and shrinking export demands are forcing manufacturers to relocate to neighboring Southeast Asian nations and many, that remain, are seriously considering to move”, a foreign trade official from the Chinese Ministry of Commerce, told ‘China Daily’ last month.

The official, who declined to be named to the newspaper, said that nearly one-third of Chinese manufacturers of textiles, garments, shoes and hats were working under growing pressure and had moved all, or part of their production, outside China. He termed the phenomena as ‘the great industrial transfer’.

A survey conducted by the ‘Capital Business Credit’, a US-based financial consultancy firm, has also revealed that 40 percent of major companies interviewed said, they have plans to move factories from China to other locations, including Vietnam, Pakistan, Bangladesh and the Philippines.

Liang Shiyu, director of the administrative office at the China Chamber of Commerce for the Import and Export of Textiles, confirmed that a large number of manufacturers have moved part or all of their business abroad.

Xiao Yujing, general manager of Zhongshan Liancheng Co, an electronics manufacturer, complained that it was increasingly difficult for his company to find international buyers at the China Import and Export Fair, known as the ‘Canton Fair’.

“Buyers have turned their eyes to manufacturers from Southeast Asian countries”, he noted, which has forced him to plan to relocate part of his business.

“We will try Cambodia, where labor costs are about just one-fourth of what we have in the Pearl River Delta” he said.

The relocation of businesses is not only considered by the domestic Chinese companies but multinational corporations either relocating or mulling over to shift their businesses.

Adidas, a German multinational corporation that designs and manufactures sports clothing and accessories, has already closed its factory in Suzhou, Jiangsu province un-employing 160 people. The company first came to China in 1980s and benefited from the economic boom of the People’s Republic but now it seems that the labor cost has compelled the company to close down its operations.

Nike, another international footwear brand closed its only plant in China’s Suzhou province in 2009.

Huo Jianguo, director of the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce, said the shift by some firms toSoutheast Asiais both “clear” and “understandable.”

China’s labour costs have surged recently by 15 to 20 per cent annually, squeezing margins and driving some companies to bankruptcy.

According to the Ministry of Human Resources and Social Security, from January to June the minimum wage was raised, on average, by 20 per cent in 16 provinces.

The minimum wage in Shenzhen, a major city in the south of Southern China’s Guangdong Province, now stands at 1,500 Yuan (US$ 238) per month, setting the highest standard for the whole Chinese mainland. Whereas many developing countries in Southeast Asia have lower labour costs that make them attractive choice for Chinese and other Multinational firms.

The Europe experienced the phenomena a decade ago when a large number of multinational giants relocated their businesses in China due to high labour costs. Now the flight of companies from China to South and Southeast Asian states particularly Pakistan, Bangladesh and Malaysia will help boost their economies.

The states like Pakistan and Bangladesh need to overcome energy crisis besides providing one-window treatment to the ‘relocating firms’ for capitalizing the real benefits.

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