Tuesday, March 19, 2019

Pakistan on the Brink of Bankruptcy and Economic Ruin

As we speak, Pakistan is hurtling towards bankruptcy.  Its situation is so precarious that even if someone tries to help, one cannot.  One needs to understand Pakistani psyche and the national mindset clearly.

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In the last 4 years, a whopping $36 billion have been taken as loans by Pakistan.  This was done to repay the maturing debt and keep the foreign reserves seeming respectable.  Just the Interest payments in the last 4 years have been $50 billion while the defense budget was $30 billion.  So the country paid twice the amount for interest – NOT principal – payments than the money used for defense budget.  By June 2017, the external debt was $79.2 billion.

Further, Pakistan’s trade deficit is now at a record $30 billion in 2017 (up 42% from the same period last year).  Now, to put this more clearly – the Exports have come down to just $18.5 billion, while the Imports have gone up 21% to 48.5 billion.  Since the industry is in a bad shape locally, so much is being imported – from small things to cars.

Despite the lowest prices for Oil, today the imports in Pakistan are 2.5 times their exports.  This is the first time in its history that such a lop-sided situation has occurred despite the low oil prices!


The situation is so bad, that for the first time, Bangladesh – an offshoot of Pakistan – has more exports than Pakistan itself!  In fact Pakistan’s Exports are mere 64% of those by Bangladesh!  Not just that, for the first time this year the Per Capita GDP in Bangladesh was higher than that of Pakistan!  A country with hardly any industry or any infrastructure when it got its independence from Pakistan, Bangladesh has come a long way!


Trade Stats

As the industries keep closing one by one due to bad political and security situation as well as expensive and debilitating power situation, the exports are projected to fall even more dramatically in the future decade!  Meanwhile, having become addicted to imported products, the country cannot survive without a high import bill!  And, this is when you even take the high cost of Oil & Gas out.

Pakistan’s Car Industry – Symptomatic of the Industrial Mess

Take the example of Cars Industry.  While India went for manufacturing in the country for the parts and also of the cars themselves, Pakistan was happy getting imports (at lower duties) or getting car parts for assembly within the country.  Today, the industry is dominated by Honda, Toyota and Suzuki.  Suzuki still sells very old models – Mehran, Bolan, and Ravi.  Without any real automotive safety standards or model upgrade policies, the industry has become the dumping ground for old models which are obsolete and useless anywhere else.  There was a time when Pakistanis would laugh at the old Ambassadors and Fiat cars when they had the imports of the latest cars from the world.  What they never understood was that India’s old and bad cars were still being manufactured in India, while Pakistan was merely importing.  When Suzuki came in with Maruti, a revolution started and India became the hub for car manufacturing over the decades after that.  India’s contribution in the global car industry is such that the iconic Jaguar Land Rover PLC is a wholly own subsidiary of India’s Tata Motors.

On the other hand, Mahindra Tractors are not just taking on John Deere – another iconic brand – IN US but also creating thousands of jobs!  The automotive plants in India are cranking out cars at the highest productivity levels – when you compare the other units of the same global car manufacturers globally.

Multinational automotive plants in India rank among the top across the world in terms of their productivity and quality. Top auto MNCs like Hyundai, Toyota and Suzuki rank their Indian production facilities right on top of their global pecking order. Despite fighting it out with factories in much larger markets – including the US and China – some of these plants fare better cranking out cars at upwards of 98-99% efficiency.

Things are changing around in the neighborhood.

National Assets of Pakistan are For Sale!

Meanwhile not only has Pakistan entered into a space where it cannot pay its external loans, while it is picking up more loans to repay the interest of the old ones – Pakistani Government also has in the last almost 4 years also mortgaged many national assets to pick money.

Jinnah International Airport Karachi in Karachi for example has been used as collateral for raisiing money via Sukuk bonds (Islamic bonds)

The Karachi airport hasn’t been mortgaged just once. Here are all the instances where it has been used as collateral:

  • 2013 was the first year where the airport was put as collateral to borrow Rs. 182 billion.
  • In December 2015, Rs. 117 billion were borrowed against the Karachi airport.
  • In February 2016, Rs. 116.2 billion were raised by putting the airport on mortgage.
  • A month later, in March 2016, the government used the airport as the underlying asset to borrow another Rs. 80.4 billion.

These amounts were received from local and international institutions and investors.

Not just Pakistan’s main airport – but its highways and motorways have also been mortgaged!  The Islamabad-Chakwal section of the Islamabad-Lahore (M2) motorway was mortgaged for $1 bn to foreign investors!  In 2014, another $1 bn was raised from mortgaging of Hafizabad-Lahore section of the M2 motorway using, yes, the Sukuk bonds!  Rauf Klasra has been exposing these deals which are done behind the scenes.  Needless to say, more highways are on the table for being mortgaged as well!

According to official reports from the Finance Minister and leaked documents from journalist Rauf Klasra the following motorways are already pledged to get loans:

  • Peshawar-Faisalabad motorway
  • Faisalabad-Pindi Bhattian motorway
  • Islamabad-Peshawar motorway
  • Islamabad-Lahore motorway

The news about the above mentioned M2 motorway was also leaked by Rauf Klasra before official announcement.

Back in 2006, the government decided to pledge most of the national highways and some motorways in order to raise Rs. 6 billion. Islamabad-Peshawar Motorway (M-I), Faisalabad-Multan Motorway (M-4), Islamabad-Murree-Muzaffarabad Dual Carriageway (IMDC), Jacobabad Bypass, D.G.Khan-Rajanpur Highway, Okara Bypass and several other toll-yielding projects were set as security. A consortium of banks provided the loan for seven years.

Meanwhile, even Pakistan TV (PTV) – the official TV channel of Pakistan Government – and Radio Pakistan are also on the mortgage block.

In fact, the same Rauf Klasra, in a recent TV program also asserted that even the Central Bank of Pakistan – the State Bank of Pakistan – is also being “sold”!