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Ever looming balance of payment crisis in Pakistan

Faced with an immediate balance of payment (BoP) crisis, the incumbent government headed by Imran Khan is working on a multi-pronged strategy, simultaneously approaching both friendly countries and International Monetary Fund (IMF) for BoP support. While initially sparking a wave of uncertainty due to lack of clarity, the Government of Pakistan’s strategy has worked well so far, considering the assurance of support from two friendly countries, Saudi Arabia and China. In this regard, Saudi- Arabia has committed US$6 billion package, with deposits of US$3 billion for BoP and deferred oil facility up to US$3 billion, while China has also assured of its support, modalities of which are yet to be decided. The GoP is also negotiating a bailout package with IMF, the size of which depends upon quantum and materialization of support from friendly countries particularly China. Assuming US$3billion support (excluding US$2 billion already deposited in August 2018) from China, Pakistan’s net financing gap for next two years would shrink to US$8 billion, as against previously estimated US$13.5 billion), necessitating a bailout from IMF in the range of US$6-8 billion.

Latest State Bank of Pakistan (SBP) data on external account paints a not so encouraging picture, with current account deficit (CAD) widening by 34% MoM to US$1.218 billion in October 2018. Once again, trade imbalance is the key culprit, where sequential growth in imports (up 24% MoM) outpaced growth in exports (up 15%MoM). Encouragingly, remittances have staged a strong recovery primarily on account of higher inflows from USA, UK and GCC. On a cumulative basis, higher remittances (up 15%YoY) and falling services deficit (down 34%YoY) have extended crucial support against increasing trade deficit, where 4MFY19 CAD now stands 5%YoY lower at US$4.84 billion compared to US$5.07 billion in 4MFY18. While analysts continue to stick with our earlier CAD estimates, recent decline in oil and coal prices are encouraging. Continuation of same should ease pressures on country’s external account, offering a window to consolidate economic fundamentals.

State Bank of Pakistan has received US$ 1,000 million on 19th November 2018 as placement of funds by Saudi Arabia, after which reserves held by the central bank rose to US$8,293.9 million and country’s total liquid foreign reserves hiked to US$14,722.4 million.

Pakistan has been bailed out more than a dozen times by the IMF but failed in developing a sustainable plan. The situation raises two serious questions: 1) IMF recipes are not aimed at providing sustainable solutions? 2) Does Pakistan fail in following IMF recipe?

 

A typical recipe for Pakistan consisted of: 1) introducing new taxes, 2) hiking utility tariffs, 3) increasing interest rate and 4) reducing subsidies and 5) devaluing currency. I am a stanch believer that all these measures can bring distortion in the economic structure of the country but just could not enable it to stand on its feet. All these measures hurt Pakistan’s economy which is heavily dependent on imports and exporters are rendered uncompetitive in the global markets. The natural outcome is that Pakistan has to approach IMF again and again and the country is plunging deeper into debt trap.

Reportedly, IMF is insisting on revising the revenue target upward to Rs 4.75 trillion for the current year — more than eight percent increase from the existing target of Rs 4.39 trillion. Practically, this means raising about Rs 360 billion additional revenues during the remaining seven months of the current fiscal year. However, Finance Minister told the IMF mission that the revenue target could be increased at best to Rs 4.5 trillion and the government’s major focus would be on recovering taxes through administrative measures.

IMF mission wanted a clear roadmap for elimination of power sector circular debt that currently stood at Rs1.2 trillion and welcomed administrative measures to recover some arrears, but insisted on further increasing electricity rates for full cost recovery of power supply. The sources said the IMF team was not satisfied with the power sector reforms plan and wanted the government to surrender its powers to set electricity tariff and let these be independently dealt with by the power regulator.

Let one point be kept in mind that circular debt is the outcome of rampant pilferage, misappropriations, corruption going on with the connivance of staff of the utility companies. The corrupt management term leakages (transmission & distribution losses) the prime factor for the poor financial health of the companies, which could be termed the biggest lie. Sector analysts say that pilferage is most common in areas having ethnic concentration and/or backing by the political, religious and linguistic parties.

Despite a stanch opponent of IMF policies, I still believe that Pakistan should accept the lender of last resort as a savior, the reasons being tough conditions, regular reviews and constant fear of delay in the release of next tranche in case the targets are not met. Pakistan faces the current precarious position only because during the regime of PML (Nawaz) least attention was paid to maintaining the balance between revenue and expenditures, boosting exports and containing imports.

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