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What Causes Inflation of Pakistan from the Perspectives of the IMF and CPEC

Why has the rupee suddenly fallen?

The rupee plunged against the dollar in interbank trading on Friday morning, hitting an all-time high of 144 rupees to the dollar in intraday trading. The national bank of Pakistan intervened to stabilize the exchange rate at 137.7 rupees, Dawn reported. The sources said, the sudden devaluation was based on the government’s commitment to the IMF. The IMF has asked the government to set the rupee at 145 to the dollar and set the interest rate at 10.5 percent as a precondition for the rescue package.The plunge suggests that the government is complying with the IMF’s demands.

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That evening, finance minister Asad Umar addressed the issue, suggesting that the national bank of Pakistan set the exchange rate and blamed the previous policy problems. He thought that devaluation caused by a variety of reasons, including increased foreign debt, reduced foreign exchange reserves and weak exports. “We have artificially revalued the rupee by buying dollars and started to import vegetables, while which eventually caused the problem that we cannot export excess sugar and wheat without subsidies.” said Asad Umar. And he also said, “You can’t control the exchange rate forever and even under the previous government, the rupee lost 28 rupees against the dollar. So,we have two options, either keeping the rupee under control or devaluing it. ” But he also acknowledged that a weaker currency isn’t a good thing because it intensified inflation. At last, he said that the devaluation, combined with other policies of the government, would produce good results.

The sudden drop in the value of the rupee has caused panic in the markets. The national bank of Pakistan said it would continue to keep a close eye on the trend and  “ready to intervene ” to prevent any unnecessary fluctuations in the foreign exchange market.

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It was the first significant devaluation of the currency.The rupee fell as low as 133.64 to the dollar on Oct. 9. The central bank devalued the rupee by 5% in December 2017 and 5% in March 2018.

Jihad Azour, head of the international monetary fund’s Middle East and central Asia department, said Pakistan’s economy was expected to slow sharply and put pressure on overall economic growth in the region. Mr Azul said, rising debt were becoming an urgent challenge to macroeconomic stability in many oil-importing countries, and that high debt were also limiting fiscal space for investment in areas such as health, education and infrastructure.The IMF believes that it is particularly urgent to boost medium-term growth through structural reforms, such as improving business conditions, increasing Labour market flexibility and increasing competition.

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How is Pakistan getting on in its quest for IMF funding?

Pakistan Business Record Newspaper reported on November 21st ,2018,the Treasury spokesman Ahmed said on Tuesday that the government and the work team of the international monetary fund (IMF) carried on the thorough exchange. The two sides in many areas unified opinion, but still have small differences to make an agreement from both sides. Pakistan will continue to engage with the IMF team to resolve differences and bridge the gap. The IMF team led by Harald Finger visited Pakistan on November 7-20, 2018, and held on-the-spot consultations on the official request for IMF assistance. This is the 13th time that Pakistan has sought IMF assistance to address the country’s payments imbalance, the report said.

After the visit, Finger said the IMF team had productive talks with the Pakistani government on economic policy and reform measures. The two sides had extensive discussions on how the Pakistani government could adopt reforms that would allow it to reduce the fiscal and current account deficit, increase foreign exchange reserves, strengthen social security, improve governance and transparency, and pursue a sustainable economic path that promotes employment. The two sides will continue their dialogue in the coming weeks. The IMF has long wanted Pakistan to implement structural reforms to rein in spending and rebalance its economy, the report said. Last month, the IMF forecast that Pakistan’s economic growth would slip to 4 % in 2019 and to 3% in the medium term.

 

Is CPEC really the cause of inflation?

On September 8, 2018, Chinese state councilor and foreign minister Wang Yi met with his Pakistani counterpart shah Mahmood Qureshi in Islamabad. In response to a question on whether the China-Pakistan economic corridor (CPEC) would increase Pakistan’s debt burden, Wang Yi said that the achievements of the CPEC are real and have not increased Pakistan’s debt burden.

Wang said “CPEC is a major economic cooperation project carried out in response to Pakistan’s needs. China is a country that values friendship between China and Pakistan. When China was in difficulties, Pakistan offered China a helping hand. Today, China is ready to reciprocate by helping Pakistan accelerate its economic and social development. I’d like to share with you a few Numbers. At present, there are 22 cooperation projects under the framework of the corridor, among which 9 have been completed and 13 are under construction with a total investment of 19 billion us dollars. These projects have contributed 1 to 2 percent to the annual economic growth of Pakistan and created 70,000 jobs for Pakistan. These achievements are tangible and visible to all. I would like to stress that the corridor is not targeted at specific regions and groups, but is aimed at the whole country of Pakistan and benefits all its people.”

Wang Yi stressed, “on the debt issue, it is the common practice of all countries to implement major projects through international financing. IMF fund and the Asian development bank have lent Pakistan money over the years. Currently, 47% of Pakistan’s foreign debt comes from multilateral financial institutions. Of the 22 projects under the CEPC, 18 are funded or assisted by Chinese direct investment, while only 4 use concessional loans from China. So it is clear that the corridor project did not add to Pakistan’s debt burden. On the contrary, these projects will gradually be completed and put into operation, which will release the economic benefits and bring considerable economic returns to Pakistan.

Wang Yi also said, “that on the issue of ‘transparency’ in the construction of the corridor, foreign minister Qureshi and I agreed that the corridor projects have always been transparent. China and Pakistan are willing to attract third parties to participate in the construction of the corridor, so that the CEPC will not only benefit the two peoples, but also contribute more to regional economic cooperation and connectivity and common development.

The government has set a target of 5.4% annual economic growth over the next five years

Pakistan the BBS express reported that Pakistan Justice Movement Party (PTI) government slightly reduced its expected growth rate to 6.7% at the end of the next five-year period, while the five-year average economic expected growth rate was set at 5.4%. This expectation is based on the expansionary fiscal policy expected by the Pakistani government, which maybe in conflict with the IMF’s possible aid package.

In the latest draft of the 12th five-year plan, the government set the five-year budget deficit at 4.9% of GDP, while setting the total expenditure under the framework of the federal public sector development plan at 5.2tn rupees, plus amount spent in four provinces, for the total of 11.75 trillion rupees. The draft plan sets taxes at 14.5% of GDP at the end of the five-year period, in 2023. Total tax revenue was 16.6 percent and total spending 21.5 percent over the five-year period.

“The 12th five-year plan covers economic growth, macroeconomic stability, raising agricultural productivity and enhancing industrial and export competitiveness,” said Bakhtiyar. In addition, human resource development, unified energy planning, infrastructure construction, social security network construction, poverty reduction, administrative reform and coping with climate change and environmental issues are also major concerns of the PTI government. The draft plan will be submitted to the national economic commission for review and approval after consultation with all parties and Economic Advisory Committee, the ministry said.

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