The new year is on track to be one of the toughest economically and financially that Pakistan has witnessed in recent times. As 2018 comes to a close, all global economic forecasters have revised down the expected economic performance of the country citing shrinking foreign exchange reserves and a high debt burden among other factors. The government has marginally succeeded in managing to get critical dollars from friendly nations. The secured breathing space better positioned Pakistan’s economic managers to bargain with the International Monetary Fund (IMF) regarding conditions that are perceived to be unduly harsh and politically costly. Currently, only significant fresh doses of investment can ease the economic pain going forward. The deficit-riddled government has, so far, been unable to close the investment gap.
The issues relating to transparency and terms of multiple deals under the China-Pakistan Economic Corridor (CPEC) are important. But the benefits of massive investment in costly infrastructure projects under this umbrella must be understood and appreciated by all stakeholders. Taking Chinese economic support for granted would be an unforgiveable mistake in both economic and political terms. There is a dire need to revive and revitalize lagging projects under the CPEC on an immediate basis.
In recent years, China has become Pakistan’s largest trading partner and the country with which it has the highest trade deficit. The reliance on Chinese currency would help finance the trade deficit from Chinese sources. Considering the recent local and global economic developments, particularly with the growing size of trade and investment with China under CPEC, yuan denominated trade with China will increase significantly and will yield long term benefits for both the countries.
In the long-term plan of the China-Pakistan Economic Corridor (2017-30) both countries had decided to use renminbi (RMB) as the second international currency to lessen Pakistan’s reliance on dollar. The yuan has attained the status of a global reserve currency, the third one after the US dollar and the euro, on Nov 30, 2016. For Pakistan, the rupee-yuan settlement of trade with China is important because it would reduce need for US dollars to a significant extent as Pakistani imports from China are in excess of $10 billion. Initially, even if 25 percent of our imports from China are to be financed in yuan, our dollar requirements would decline by $2.5 billion within a year. Through this move, the two countries aim to promote monetary cooperation between the central banks, implement existing currency-swap arrangements, research to expand the amount of currency and explore to enrich the use and scope of bilateral currency swap and assign the foreign currency to domestic banks through credit-based bids to support the financing for projects along the CPEC.
Due to delay in finalization of an IMF program, the government is looking for various alternatives to meet the external financing needs, which are now estimated at $22 billion. The government, while continuing its multi-pronged approach for bridging the external financing needs and building forex reserves, has decided to launch RMB denominated “Panda” bonds which will help government diversify investor base of capital market issuance and provide a source of raising RMB. The size of the issue is yet to be determined, but a source in the finance ministry said it will be around $500 million to $1 billion in different tranches. At least one tranche is expected during the current fiscal year. The bonds will be issued in several rounds and a good response is expected, considering the interest shown by Chinese banks and investment groups.
The challenges Pakistan is facing demand that key political and economic players realize the gravity of the situation and evolve a short-term consensus regarding a minimum economic agenda to ensure political stability in the tough phase ahead. Now is the time for private sector to rise up to the occasion as without local investor mobilization, expecting FDI inflows in unrealistic. Fast tracking the CPEC industrial economic zones can provide the desired momentum. Presently, the asset owning class, with its very narrow focus, is clearly inclined towards short-term investment avenues to keep their money rolling. If the government could mobilize this class to develop an appetite for risk, come out of their comfort zones and assume charge for industrialization, the current economic stress can serve to reorient the direction of the economy towards a more stable base.