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Approaching IMF no more preference?

One completely fails to understand the reasons behind Government of Pakistan’s reluctance in approaching the lender of last resort International Monetary Fund (IMF). It goes without saying that borrowing from any source, other than IMF, is highly expensive. However, it seems that the incumbent government fears that in the election year approaching the IMF would not allow it to go for various extravaganzas. Analysts have the consensus that remaining under the ambit of IMF certainly forces the borrowing countries to follow certain conditions to avoid imprudent spending.

According to a news items, the incumbent government plans to launch another international bond to mobilize up to US$1.5 billion – indicating its commitment not to knock at the IMF’s door to address anemic external account position. The statement looks a little amusing as it says “We will be considering launching another bond if need arises.” The source claim, “We have finalized our plan for continuously pouring dollar inflows in order to meet yawning financing gap on external front.” Lately, Pakistan raised US dollar denominated Sukuk and Eurobond worth US$2.5 billion in New York against the total offered amounts from investors by US$8 billion in order to stop depletion of foreign currency reserves, which had slipped to US$19.7 billion in November 2017.

The country mobilized US$1.092 billion commercial loans from foreign banks in current fiscal year (July-November) 2017-18, surpassing the budgeted estimates of US$ one billion for the entire year. The total external assistance for July-November 2017 amounted to US$2.877 billion (including US$1.092 billion commercial loans), revealed the Economic Affairs Division (EAD). The government has so far signed short-term commercial loan agreements of US$1.417 billion in the current fiscal year 2017-18 with different foreign banks of which US$1.092 billion have been materialized. The government signed a new agreement for raising US$200 million commercial loans from Standard Chartered Bank (SCB) London on 31st October, 2017 and has raised US$70.37 million. The government procured $500 million commercial loans from Industrial and Commercial Bank of China Limited (ICBC) in October. Furthermore, US$50 million were solicited with Credit Suisse-led consortium of banks, bringing the total to US$255 million from the consortium. The consortium consists of Credit Suisse AG, United Bank Limited and Allied Bank Limited. The country procured US$267 million commercial loans from Citibank during the current fiscal year for budgetary support.

It is evident that Pakistan’s exports are highly inadequate for financing imports and debt services. Till recently remittances were one of the biggest sources of foreign exchange for the country. After the plunge in crude oil prices, remittances also declined and became a cause of serious concern. To overcome this, the government is taking several strategic initiatives to promote inflow of home remittances in the country. In this regard the GoP in collaboration with the State Bank of Pakistan (SBP) and financial industry has launched a scheme for promotion of home remittances through m-wallets.

 

The scheme will help in channelizing home remittances through Branchless Banking (BB) channels. “It will help achieve twin objectives”, said the Prime Minister, “Firstly, it will facilitate the populace by provision of home remittances in swift, convenient and cost effective manner by utilizing the network of BB agents across Pakistan; secondly, it will help enhance the usage of m-wallets and creation of digital accounts. The government has also announced budgetary support to incentivize home remittances through M–Wallet accounts.”

In Pakistan remittances have been the second-highest source of foreign exchange earnings for the country, after export receipts. ‘Over the past 10 years, remittances have grown at a compound annual growth rate (CAGR) of over 12 percent – one of the highest growth rates for any country in the world. Pakistan’s relatively better performance in the region can be attributed to sustained increase in emigrant workers during past few years and supportive policies of the government and the State Bank of Pakistan. Home remittances through M-Wallets will help in achieving two objectives: 1) increasing financial inclusion in the country and 2) making transfer of home remittances faster and at low cost.

SBP has been pursuing a long-term strategy to address financial exclusion through regulatory and market-development initiatives. Alternative channels are providing flexible, cost-effective, and convenient modes of doing transactions. The industry has progressed remarkably during last few years. Over the last six months, 27.3 million mobile wallets have been added. This growth has resulted in providing basic banking services close to locations of customers, thereby saving their time and costs. Deployment of technology led banking to provide tailor made solutions to the masses can to satisfy their financial needs.

Selecting any option, other than IMF, for overcoming balance of payment crisis may be a welcome sign. However, in a country where policy planners suffer from myopic vision the decision has to be examined more than once. While the quantum of assistance by IMF may not be of any substantial, various benefits are attached to it. While all the multilateral financial institutions continue to offer assistance, stringent conditions imposed by the IMF force the beneficiary country to follow more prudent policies. Following prudent policies can help in not only overcoming the existing balance of payment crisis, but also bring down debt servicing to a sustainable level.

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