Unlocking Tomorrow with Aiblogtech Today

Pakistans Economy Struggles in a Global Economic Resurgence
Economy News World

Pakistan’s Economy Struggles in a Global Economic Resurgence

Pakistan's Economy Struggles in a Global Economic Resurgence

While the global economy rebounds from the impacts of the Covid pandemic and the Ukraine conflict, Pakistan’s economy undergoes a sustained decline. A recent report from the World Trade Organization (WTO) highlights a more positive global trade outlook, despite negative headlines. Additionally, even in the face of escalating trade tensions between the United States and China since 2018, their trade achieved record levels last year.

The trade tensions between these two major trading partners, which initiated in 2018, resulted in a tit-for-tat increase in import tariffs. However, the WTO report underscores that despite these challenges, bilateral trade continued to grow. Furthermore, there has been a rise in unilateral trade-related measures that WTO members have raised across various platforms. This shift reflects changing concerns, driven by increased international cooperation and broader integration, which in turn facilitates trade, inclusiveness, and environmental sustainability. These factors collectively contribute to global economic recovery.

However, Pakistan is facing serious economic challenges. Recent reports reveal that last month, the country’s interest payments soared to Rs. 537 billion, while its income only amounted to Rs. 381 billion. This means there was a significant shortfall of Rs. 156 billion, representing a 41% deficit compared to the federal government’s net income for the month. These developments are causing concerns that the annual cost of servicing debt may exceed the budget allocations due to increasing interest rates.

Pakistan’s Debt Situation has become Unsustainable

The provisional federal fiscal operations for July, marking the start of the fiscal year 2023-24, indicate that Pakistan’s debt situation has become unsustainable. The country is now primarily borrowing funds to cover interest payments, which is leading to a mounting debt burden. Interestingly, just a year ago, the net income was sufficient to meet interest payments, but the current situation is quite different.

Furthermore, the continuously rising interest rates have compelled the federal government to borrow Rs. 1.3 trillion at a steep rate of 24.5% for a three-month period. This rate was 2.5% higher than the key policy rate. Market sentiment appeared hesitant to lend money to the government due to reports suggesting that the central bank was contemplating an increase in the key policy rate to 25%, although the State Bank of Pakistan (SBP) denied such reports.

Beneficiaries of the Benazir Income Support Programme (BISP)

The federal government found itself in a situation where it had no alternative but to secure these expensive loans. This was mainly because its available cash reserves fell short by nearly Rs. 1.5 trillion compared to the immediate financial needs. To put it in perspective, the government had scheduled debt repayments of Rs. 2.05 trillion and had to make interest payments of Rs. 310 billion within the current week, which also included payments to beneficiaries of the Benazir Income Support Programme (BISP), totaling around Rs. 80 billion.

It’s worth noting that for the current fiscal year, the government has allocated Rs. 7.3 trillion for debt servicing, although this figure might escalate to Rs. 8 trillion.

Federal Government Agreements with the International Monetary Fund (IMF)

In the previous fiscal year, the federal government missed its budget targets and deviated significantly from the agreements made with the International Monetary Fund (IMF). This led to a substantial increase in public debt, which surged from Rs. 44 trillion in March 2022 to Rs. 61.8 trillion by July of this year.

This situation unfolded because the federal government’s total spending increased by a significant 20% compared to the same month the previous year, totaling Rs. 645 billion. This forced the government to borrow money even for defense expenses. Notably, the government made a questionable decision to take on the responsibility of the polio eradication program, which required an expenditure of $1.8 billion. Additionally, development spending also saw a substantial rise, increasing from Rs. 5 billion to Rs. 16 billion compared to the previous year. This increase suggests preparations for upcoming elections involving the parties of the coalition government.

Another challenging issue faced by Pakistan’s financial decision-makers is Saudi Arabia’s reservations regarding the protection of its investments and rights in Pakistan. This has prompted Pakistani authorities to conduct a thorough review of the situation and set strict deadlines to secure much-needed investment in the Reko Diq gold and copper mines. Saudi Arabia has expressed interest in making a multibillion-dollar investment in the Reko Diq project, and Saudi leadership is eager to move forward quickly. However, the project’s bankable feasibility study has not yet been completed. In this context, it was reported that a Saudi Arabian delegation visited Pakistan last month, showing interest in investing in major projects pending resolution of specific issues.

Pakistan is aiming for approximately $25 billion in investments from Saudi Arabia, which it hopes to secure within the next three to five years under the Special Investment Facilitation Council (SIFC) framework.

Saudi Arabia interested in investment

Saudi Arabia is interested in investing in various sectors, including mines, minerals, power, agriculture, and plasma products. However, there have been reports of Saudi Arabia encountering obstacles when it comes to repatriating profits earned by foreign investors. The State Bank of Pakistan (SBP) is not allowing a free outflow of dollars due to low foreign exchange reserves, which has led to dissatisfaction among both existing and new foreign investors.

Furthermore, it has been noted that Saudi Arabia has inquired about the investment protection framework and dispute resolution mechanisms in place. They have also expressed a desire for additional benefits from their investments, although the specifics of these benefits were not specified. Notably, Saudi Arabia is particularly interested in investment proposals from two of its companies, Aramco and ACWA Power, which intend to establish oil refineries and invest in renewable energy projects.

Saudi Arabia negotiations on the Reko Diq project

To facilitate negotiations with Saudi Arabia regarding the Reko Diq project, negotiation and oversight committees have been established under the Special Investment Facilitation Council (SIFC). Additionally, the SIFC has directed relevant ministries to identify and enhance existing brownfield investment opportunities through the SIFC platform to attract new investments in these projects. It’s worth mentioning that the SIFC has approved an exemption from the Public Procurement Regulatory Authority (PPRA) rules for hiring financial advisers to meet the set deadlines for transferring Reko Diq shares to Saudi Arabia’s favor.

The Special Investment Facilitation Council (SIFC) has directed the finance ministry and the State Bank of Pakistan (SBP) to assist Pakistani shareholders of the Reko Diq project in making foreign currency payments to their advisers. Additionally, the SIFC has given permission to the energy ministry to engage local legal advisers, technical consultants, and financial advisors for the Reko Diq project, outlining their future course of action.

On a different note, the interim government is facing pressure from both the public and the establishment to improve the country’s financial situation. In response to public concerns over inflated electricity bills, the interim government has taken action against power theft. It has been reported that eight million units of stolen electricity were detected, resulting in fines totaling Rs. 352.4 million, of which Rs. 27.25 million has been collected so far.

These consumers engaged in electricity theft through various means, such as direct supply, meter tampering, shunt systems, and other methods. All electricity supply companies, also known as DISCOS, are participating in this nationwide crackdown, with reports suggesting that LESCO and MEPCO are performing better than other companies.


Your email address will not be published. Required fields are marked *