All Sorts of Things

Random posts on all sorts of things designed to inform and provoke.

Pakistan: Please Keep Remitting Otherwise We’re Screwed!

pakistan-economy[1]The good economic news just keeps flowing out of Pakistan with the latest one being that the country’s foreign exchange reserves have gone under the three months of import and debt repayments benchmark. Since a government generally reaches out to international funding institutions (IFIs) when this happens, it shouldn’t surprise anyone if Islamabad does so as well. However, given the governments past non-compliance with their conditions, will the IFIs respond positively to Pakistan’s pleas?

On an even more somber note, while the below-benchmark figure – $13.5 billion – sounds bad, the worse news is that the government’s share of this under $9 billion and this is what Islamabad has to cover the country’s $66 billion in foreign debts and a $6 billion trade deficit. Obviously, the Pakistani government does have access to other funds, aid from the United States, for example. However, the most accessible is held by the commercial banks – that amount rose from $4.72 billion to $4.79 billion in October. This increase is largely due to the strong level of consistent remittances from overseas Pakistanis which increased 15 percent over the past year and reached $1.3 billion in October.

While Pakistanis around the world send money back home to their relatives or for investment, 60 percent of these funds come from countries in the Arabian Gulf – Saudi Arabia, United Arab Emirates, Bahrain, Kuwait, Qatar and Oman. This makes sense because Pakistanis living in Arabian Gulf countries aren’t immigrants but expatriates and are working in those countries to generate income for their families back home. By the way, the nightmare scenario for Islamabad would most likely be if these nations decided to grant permanent residency/citizenships and all these Pakistanis decided to leave their families or if their economies drastically slowed and the jobs dried up.

If Pakistan’s economy collapses even more and Islamabad decides to absorb all the foreign exchange held by the commercial banks, will that be enough to keep the economy afloat and avert a Balance of Payments crisis? The answer is obviously no and, therefore, the government needs to find other sources of revenue. Exports and foreign investment can help but given Pakistan’s horrible infrastructure such as lack of electricity and impassable roads, high levels of corruption, and uncertain security and political conditions, this is unlikely to happen. In that case, the options are getting funds from IFIs – who will likely impose more stringent conditions – or the US – who will likely demand more access. Islamabad is, consequently, stuck between a rock and a hard place but, unsurprisingly, seems to be ignoring the serious nature of this impending crisis. It is being assisted in this denial by the Karachi Stock Exchange which has hit record highs in eight of the last nine sessions based on nothing more than speculation and an assumption of increased government investment. It seems that everyone has put their trust in Allah but refuse to take any steps to help Allah help them.

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This entry was posted on December 7, 2012 by in Global Economy and tagged , , , .
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