FACING IMF WITH COURAGE
WHILE PAKISTAN CONTINUES TO SUFFER STRUCTURAL WEAKNESSES, THERE IS INKLING OF IMPROVEMENTS.
SHABBIR H. KAZMI
Apr 25 - May 1, 2011
Finance Minister, Dr Abdul Hafeez Sheikh along a delegation went to Washington to participate in the annual spring meetings with the International Monetary Fund (IMF) and the World Bank on April 16-17, 2011. The spring meetings bring together world finance leaders and heads of international financial institutions. Included in the Pakistani delegation were Governor State Bank of Pakistan, Deputy Chairman Planning Commission, Secretary Finance, Secretary Economic Affairs Division, and Chairman Federal Board of Revenue.
Dr Sheikh highlighted Pakistan's progress towards economic reforms, positive exports trajectory, growth prospects, and importance of international partnership in the country's development in a series of meetings. The delegation informed the two important donors about the efforts being made by the government of Pakistan to tackle the key issues like high inflation rate and energy shortages. The Pakistani delegation would also apprise the lenders about the steps being taken by the government to bolster revenue collection, control expenditures and contain fiscal deficit.
The finance minister also had a meeting with IMF Mission Chief for Pakistan Adnan Mazaeri and discussed progress towards completion of the $ 11.3 billion program ahead of the fifth review of the performance for release of last two remaining tranche of $3.3 billion. Besides representing Pakistan at various forums of World Bank and IMF, Dr Sheikh met with the World Bank President Robert Zoellick, senior IMF officials and his counterparts from several countries including Germany, China, and U.K.
Some of the experts said negotiations with the IMF would be difficult because Pakistan had not been able to meet some of the targets agreed with the lender of last resort. Pakistan's foreign exchange reserves are at a record high yet some of the experts have reservations about the sustainability of these reserves. Foreign exchange reserves having touched all time high of $17.95 billion have registered a marginal decline to $17.31 billion.
Khalid Iqbal Siddiqui, Director, Invest and Finance Securities see the situation in slightly different way. His point is when experts talk about record-high foreign exchange reserves they must also take into account that out of the total reserves nearly $8 billion is the amount Pakistan has received from the IMF and there are other foreign loans. Therefore, it may be said that around 55 per cent of the reserves have been earned by Pakistan and the rest are borrowed. Pakistan entered into an IMF loan program in November 2008 to avert a balance of payments crisis and so far about $8 billion has been received by the country, with an additional $451 million loan to cope up with the devastating summer floods that caused damages of around $10 billion.
Officials said despite last year's devastating floods and security challenges along with issues pertaining to Afghan, Pakistan is likely to post far better growth contrary to forecast of disappointing performance. Major crops i.e. sugarcane, wheat and cotton are expected to surpass targets while exports, particularly those of food items and textiles, are set to fetch billions of dollars. Remittances sent by expatriate Pakistanis are also expected to exceed the target.
The good news is that sugar production is likely to increase the total availability to more 4.2 tons and there may not be any need to import the commodity at all. However, to ensure that sugar remains in the country its smuggling to neighboring countries has to be stopped.
Pakistan is also likely to achieve above 25 million tons wheat output, creating prospects to earn some extra foreign exchange by exporting surplus wheat. If Pakistan succeeds in stopping smuggling of wheat, the country can export up to half a million wheat and also earn huge foreign exchange as commodity prices are sky rocketing in the global markets.
Some experts said Pakistan's forex reserves have grown steadily thanks to higher export proceeds as well as record inflow of remittances. However, it is also a fact that growth in exports is mainly driven by ever rising cotton prices. Exports increased 26.5 per cent during first nine months of current fiscal year mainly due to quantum jump in the export of textiles and clothing. Experts also said once cotton prices start declining, a similar trend may also be witnessed in the exports of textiles and clothing.
However, the real cause of concern is crude oil prices hovering around US$100/barrel. On one hand, higher oil prices will erode foreign exchange reserves and on the other hand, it will force the electricity distribution companies to raise tariff, which will increase cost of production and may also render local manufacturers uncompetitive in the global markets.
Remittances by overseas Pakistanis have touched US$8 billion during the first nine months of the current fiscal year and the most striking feature has been receipt of U$1.05 billion during the month of March. Ashfaque Hasan Khan, Director General at NUST Business School in Islamabad was skeptical. The apprehension was based on the growing turmoil in The Middle East and North Africa. If Pakistanis working in these countries are no longer safe in those countries and are forced to flee, the inflows would also be suspended. However, some experts said that growing inflows from Europe and USA and Far East might partly make up for the decline, if any.
While entering into another standby program may not be necessary, some experts term it a must because then Pakistan will have to be more prudent, knowing that IMF's letter of comfort makes flows of funds from other multilateral donors easier.