The crisis has its roots in the current account deficit, in which the value of imports exceeds the value of exports. The country’s current account deficit has grown four times in the last two years. It touched $18 bn in FY 18, up 42.5% over the previous fiscal year. Two years ago, it was at $4.876 bn and rose to $12.621 bn in the next one.

In 2017, between July and March – about 70% of the country’s import bill was for energy, machinery and metals, according to AFP reports. The import bill ballooned mainly due to higher oil prices and imports from China—which is involved in building several infrastructure projects in Pakistan under the China-Pakistan Economic Corridor programme. Since December, Pakistan has devalued its rupee four times with an aim to make its exports cheaper. The country and its economic policies have suffered, due to corrupt regimes, faulty policmaking and low tax revenues.

Now, the only visible option remaining to Pakistan is to go to the International Monetary Fund (IMF) for a loan. The country has borrowed from IMF more than a dozen times since 1980. Though the total financing gap for the current fiscal is at around $12 bn, the country could not get more than $9 bn from IMF, in accordance to its maxmimum quota. However, this may pose a challenge, as the US itself has warned the IMF to pay Pakistan, as the country is hoping that the IMF can help pay off its China debt.

Even if IMF decides to help Pakistan, it will bring strict conditions that might further devalue the currency. This will severly jeapordise Imran Khan’s new government as well as affect economic growth. Pakistan can also seek Saudi Arabia’s help, but all the Gulf country can do, is defer the oil payments. Borrowing from China is another option, but rising Chinese debt is already a worry for Pakistan. A higher debt burden can prove to be even more of a challenge, as China has already lent Pakistan $1 bn in June to boost foreign reserves.

All things considered, the Imran Khan government has its task cut out in front of it—and a mountain of challenges ahead.

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China ranks second with an anticipated current account surplus of $245 billion. The USA, by contrast, is expected to show the biggest capital imports in the world, with a deficit of $478 billion for 2016.

Current account surpluses (goods, services, interest rates, wages and transfer payments) mean capital exports, while deficits represent capital imports.

Germany’s current account surplus is expected to have risen to 8.6 percent of its annual economic output in 2016, versus 8.3 percent in 2015. The EU sees a maximum figure of 6 percent as sustainable in the long term.

Germany’s current account surplus is mainly due to trade in goods, which generated a surplus of €255 billion up to November. The key driver was higher demand from the rest of the euro area, as well as from European countries outside the EU. On balance, foreign-source income was positive up to November at €53 billion, meaning that German received net wage and interest payments from abroad. Services and transfer payments represented a negative contribution of €66 billion.

The increase in Germany’s net foreign assets is primarily reflected in the rising volume of foreign securities acquired by Germany; its net purchases totalled €193 billion by November of last year. Its foreign direct investments, by contrast, amounted to a mere €18 billion.

The US current account deficit is primarily due to trade in goods, with net imports totalling $557 billion dollars by the end of the third quarter of 2016. On balance, the deficit is particularly high in goods traded with Asia. The balance with the euro area, however, is also negative; with net imports from Germany accounting for half of the US deficit. Transfers of $120 billion also had a negative impact up until the end of the third quarter of 2016. Services and foreign revenues were positive on balance at $306 billion.

A current account surplus goes hand in hand with net capital export. In a country with net capital export, domestic savings are higher than domestic investments and the country accumulates foreign assets. Conversely, a current account deficit implies that a country is absorbing more than it is producing and accumulating foreign debt.

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IFM Correspondent

October 19, 2016: Saudi Arabia has officially launched its first international bond sale. The move comes as the Kingdom looks to debt markets to help ease its cash squeeze as a result of the two-year oil price slump. The low oil price has led to a huge debt for Saudi Arabia, which is battling widespread job cuts, loss of projects and slow economic growth.

The sale has officially started with the Kingdom aiming to raise $10 to $15 billion in three offerings — five-year, 10-year and 30-year bonds. The government aims to sell dollar-denominated bonds due in five years for a spread of 160 basis points, 10-year notes at 185 basis points and 30-year securities at 235 basis points. This is much higher than similar bonds issued by Qatar.

Saudi Arabia has for years run its economy based on export of oil but was last year facing a budget deficit of up to $97 billion.

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Suparna Goswami Bhattacharya

May 13, 2016: With oil price continuing to show no signs of improvement, it is no secret that oil dependant nations have to think of alternatives to run their economy. The Kingdom of Saudi Arabia recently announced a slew of measures titled ‘Vision 2030’ to help the economy make a smooth transition away from oil.

Thirty-year-old Deputy Crown Prince Mohammed bin Salman emphasised that urgent steps needed to be taken to save the economy from running out of cash reserves. According to estimates, the Kingdom had cash reserves of $746 billion in 2014, which is now down to $616 billion. “To be fair, this is still a lot compared to other nations, but the fact is cash reserves are depleting fast. And there is no major alternative source of income apart from oil,” says Hassan Ahmed, an independent researcher who studies Middle East economies closely.

Saudi Arabia’s budget deficit in 2016 stood at $87 billion, which was slightly less than the 2015 figure of $98 billion. However, these figures do not take into account the cost of the war in Yemen. So, in actuality, the numbers could be well above $100 billion.

Vision 2030 aims to restructure the economy such that it will not rely on oil as its primary source of revenue. It also includes a much-awaited National Transformation Programme (NTP), which will include a drive for efficiency, tax increases, strategic spending cuts and a bigger role for the private sector.

The goals will be achieved by 1) replacing imported products; 2) creating an ecosystem for entrepreneurship; 3) transforming the welfare state.

According to Saudi American Public Relation Affairs Committee (SAPRAC), the vision revolves around, but is not limited to, privatisation, governance, investing in human capital and economic diversification.

“I am mostly impressed by the aim to increase non-oil government revenue. I believe it is the most ambitious and vital cornerstone of Saudi’s vision for 2030, as it will require an extensive reformation of Saudi Arabia’s income model,” says Salman al-Ansari, founder and president of SAPRAC.

The reforms envision increasing the role of women in the workforce from 22% to 30%. Towards this end, the government announced a special business park for women, which is expected to create around 21,000 jobs.

Saudi Arabia is restructuring its housing ministry to increase supply of affordable housing by creating a ‘green card’ system within five years to give expatriates long-term residence.

Masood Ahmed, director of the IMF’s Middle East and Central Asia department, says, “I do see a number of actions plans to address the budget deficit. That gives us comfort and encouragement. The scale of the plan measures up to the challenge facing the economy.”

A report by SAPRAC states that the Kingdom should create a specialty industry. For example, the country should produce experts in building and designing carbon fibre vehicles. Such experts can turn Saudi Arabia into a premiere destination for acquiring expertise and logistical advice in the industry in question. For example, Taiwan produces computer chips so cheaply yet effectively that barely any other country bothers making them, leaving Taiwan to reap all the financial and economic benefits.

“There is a need to create a technical working middle class, which is now almost totally comprised of expatriates. The young generation have got used to doles from the government. Saudis should be made to realise that everything cannot be taken care of by the government,” says Ahmed, an independent research analyst.

For instance, all 1.2 million college students inside the country receive free university enrolment, free books, free use of labs, dorms and professors. In addition to that, they all receive SR 990 ($26,399) monthly regardless of their economic status. This is unheard of in any other nation.

Additionally, Saudi Arabia has been a country where money was sent out as quickly as it was made. To build a nation with a robust economy, capital is needed from both private and public sectors. With the private sector having no incentive to keep their money inside the country, this will be a handicap to the development and diversification of the economy. Hence, it is important to move away from cradle-to-the-grave social welfare by introducing taxes to people that can afford them (say, property tax and VAT on retail products).

The government aims to increase foreign direct investment (FDI) to 5.7% of GDP as against the current 3.8%. Traditionally, the compiled wealth has left the country as fast as it’s been accumulated, as expats transfer up to 90% of their income to their home countries. Even wealthy Saudis regularly invest in foreign stock markets and various savings accounts abroad. Since the slump of 2014, Saudi Arabians have sent about $73 billion out of the country.

The steps have been announced and now it’s about implementation.

“One of the goals is to have a more efficient government that is less hampered by bureaucratic red tape. Steps to achieve this are already being undertaken. At the very latest, you will start to see these reforms come to fruition some time in mid-2017,” says al-Ansari.

Though the road ahead is not easy, the fact that the government has made a start is reassuring for the global economy. And, what happens in Saudi Arabia will impact the global economy, or at least the Middle East countries.

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Tim Evershed

April 17, 2015: Uncertainty surrounding the result of next month’s UK general election is sending the sterling on a rollercoaster against the dollar.

On April 10, the pound fell to a five-year low against the dollar as election jitters combined with weak industrial data took it from $1.4623 from $1.4931 earlier in the month. The currency recovered some lost ground the following week ($1.4833).

The rebound confounded the conventional wisdom that expected the pound to fall in the run up to the election before rising after. But, it underlined the volatile nature of the market as the polls continue to show an election that is too close to call.

The Conservative and Labour parties are neck and neck in the polls making a hung parliament, in which no party wins overall control, likely and investors fear coalition negotiations will drag on much longer than after the last election in 2010.

A note from the bank Morgan Stanley said: “Under our base case scenario of the next UK government being led by one of the major parties, we would expect renewed fiscal austerity, which will lead to a slower growth picture in the UK.”

Investors are concerned that a Labour government might be unable to deal with Britain’s deficit and will slow economic growth, especially if it has to make a deal with the Scottish Nationalist Party.

On the other hand, a Conservative-led administration could lead the UK out of the EU, particularly if it has to work with UKIP, and that is a prospect that frightens many investors and businesses.

A hung parliament could even cause a “Lehman moment” for the UK, according to Kathleen Brooks, research director at Forex.com

Brooks added: “We’ve seen volatility pick up and that’s because of the election uncertainty. We don’t know whether or not we’ll be under a Labour government that could be bad for the deficit, or under a Tory government that could take us out of Europe. Will we even have a government at all? There’s still a big chance of a hung parliament.”

The old adage is that markets hate uncertainty and that is certainly proving true with some predicting movements of up to 5 cents in either direction before and after May 7.

Currency traders are looking nervous at the moment with options, used to hedge exposures, in demand while risk reversals, a gauge of demand for options on a currency rising or falling, show a huge bias for sterling weakness against the dollar in the coming month.

Adding to this toxic mix for the pound is an inflation rate of 0% for February and March, according to the Consumer Price Index. This raises fears of deflation in the UK economy and would put pressure on the Bank of England to cut interest rates from its current 0.5%

The prospect of the UK maintaining, or even cutting, its historic low interest rates would be expected to keep the pound valuation down against the dollar.

Kit Juckes, an economist at Societe Generale, said: “I can’t see how the election can provide a positive outcome for the sterling. It’s just a source of uncertainty for international investors. Apart from the fact that it would be an enormous shock if you got an outcome where any single party could form a government, the politics just produces negative sentiment, volatility and a nervousness that has bred the sense that nobody wants to buy the pound.”

Also Read:

Singapore draws up smart plans

Impact of Osborne’s budget on business

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