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Crumbling economy and the juggling bailout options

New Finance Minister Asad Umar will come up with a strategic plan about fixing external-sector issues. Any delay in seeking a balance-of-payments support program by the International Monetary Fund (IMF) may tremble the confidence in the economy of Pakistan the rupee. Exercising other options to stable the balance of payments needs a long time to good results. Pakistan facing foreign exchange crisis cannot afford to rely solely on them.

The Finance Minister Asad Umar has made a detailed presentation to Imran Khan on not only the projected size of external-sector financing gaps but also viable options the government can exercise to bridge. If the government decides to return to the IMF to seek immediate balance-of-payments support, it will take parliament into confidence.

Further to the IMF bailout, some other options for fixing the external-sector issues include borrowing from Islamic Development Bank and Asian Infrastructure and Development Bank, seeking financial support from China, Saudi Arabia and the United Arab Emirates, recovery of ‘plundered wealth’, launching of sovereign bonds and initiating investment schemes for overseas Pakistanis. Real reforms in the export sector can also increasing dollar earnings with some time lag.

The austerity drive has already started. A huge cut in development expenses, a large revenue generation plan and a fierce fight against corruption are going to become an indispensable part of the government’s response to the external-sector issues.

The choice will be is to encourage exports and offer overseas Pakistanis profitable bonds. There is the option of seeking bilateral funds from friendly countries, before looking for multilateral cash. A decision to use the IMF option will be made by the end of next month.

Despite his uttering Omar Asad would like to ask the IMF for money only after exhausting other preferred alternatives. He has at least hinted at seeking dollars from every source available.

“The (external account) situation is so dire, we don’t have the luxury of choosing one option, but will have to plan all options in parallel, including the IMF support,” he had told a media briefing last week.

Asad Umar talking to newsmen said he could not say anything about the exact size of the country’s financing requirements for the ongoing year because he did not have access to official numbers.

Eminent economist Dr Hafiz Pasha had recently had stated that Pakistan’s financing needs stood around over $26 billion. This compares with the IMF estimates of $27 billion and the finance ministry’s calculation of $23 billion. The former caretaker finance minister was of the view that the incoming government would be facing a massive financing gap of around $12 billion during the current year.

Dr Waqar Masood, a former finance secretary who negotiated the last two bailout packages with the IMF in 2008 and 2013, feels that immediate IMF support is the only option available to bail out the crumbling economy.

“Bilateral cash from friendly governments (like China and Saudi Arabia) is not an option. Bilateral funds are no substitute for the Fund’s dollars.” The Fund is not going to hand cash to next government without demanding something in return. Economists like Dr Pasha believe the IMF dollars will have many economic and non-economic strings attached to them.

It is not an easy job to get the money from the IMF considering the current state of Pakistan’s relationship with the United States. There is a requirement team of skilful negotiators for the job to be done on favorable terms. Dr Masood says that the loan conditions could be tough.

 

Economists such as Dr Shahid Zia argue that the incoming government will have to find out all options available to it for securing funds to increase the foreign currency reserves.

The finance team better acquire funds from every available source — multilateral, bilateral, overseas Pakistanis, can boost our exports and convince overseas Pakistanis to invest in their homeland. If we want to avoid a similar crisis after five years, the incoming government will have to take some tough decisions and people will be required to bear burden.

State Bank foreign exchange reserves of $9.88 billion can hardly cover two months of imports, the rupee has shed another 2.25 percent in a little over two months of this fiscal year. The current account deficit in July stood at $2.2billion and the overall balance-of payment gap was $582 million.

Finance Minister Asad Umar says our external financing gap in this fiscal year will be at least $9 billion. This is far from over. The reconstituted Economic Advisory Council (EAC) has called for revising the 2018-19 budget presented by the preceding government. The revision might give the incoming government some fiscal room and help check external sector distress as well.

The decision to go back to the IMF is being delayed without concrete reason as sentiments on the issue of self-reliance run high government circles. Even then hopes are on a number of other options.

From bringing back home part of $110 billion or even $150 billion that reportedly belongs to Pakistan but resides abroad to auctioning luxury vehicles of Prime Minister House, all options are in headlines in the national press.

United States had already warned the IMF to be careful while lending to Pakistan. Pakistan is at the point of balance-of-payments troubles, which menaced the stability of its currency and its ability to repay debts or pay for imports. Its budget deficit has grown steadily over the past five years, from four percent to 10 percent of GDP.

Imports have accelerated, mainly due to rising oil prices. Between July 2017 and March, about 70 percent of the country’s import bill was for energy, machinery and metals, according to a State Bank of Pakistan report. Exports are mainly textiles that have increased a bit.

The foreign currency reserves have declined to about $10.3 billion, according to recent figures given by the caretaker government.

This covers less than two months of imports, analysts say. Meanwhile the rupee has been devalued four times since December, fuelling inflation.

Pakistan has gone to the IMF repeatedly since the late 1980s. The last time was in 2013, when Islamabad got a $6.6billion loan to solve an identical crisis.

Islamabad is adamant on a maximum of $6.5 billion, hoping that this will have an unrighteous effect on the confidence of the markets.

The new government is considering privatizing all state-owned companies, including the debt-laden Pakistan International Airlines.

There are fears that the terms of any new IMF bailout will be stricter than in 2013, due the bitter relationship between Islamabad and Washington, one of the Fund’s biggest donors.

The US has warned that it will be watching closely to ensure Pakistan does not use IMF money to repay debts to China, which has poured billions into the country for infrastructure projects under its Belt and Road Initiative.

Local media have reported a recent $2billion loan from China and another $4.5 billion from Saudi Arabia, though the transactions have not been confirmed. In any case, Saudi funds would only be used to buy oil.

In the context of a trade imbalance, Imran Khan could try to reduce imports. But such measures have never been success with the country’s porous borders and numerous smuggling networks, especially for consumer goods.

The World Bank ranked Pakistan 147th out of 190 countries last year for its business climate.

Imran Khan has vowed change on the home front too, saying his government will dramatically boost tax revenues. That is a major challenge and only a small percentage of those liable actually pay taxes in the country. A further increase in devaluation of the rupee, would reduce imports and make exports cheaper and more competitive, could be contemplated.

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