By Shabbir H. Kazmi
Reportedly, Saudi Arabia has finally agreed to offer Pakistan a US$6 billion support package to overcome its prevailing precarious current account deficit crisis. According to the details the Kingdom will transfer US$3 billion directly to Pakistan, while another one-year deferred payment facility of up to US$3 billion for oil import will be made available. This arrangement will be in place for three years, which will be reviewed thereafter.
During the election campaign and even after taking oath as Prime Minister of Pakistan, Imran khan has been expressing reluctance in approaching International Monetary Fund (IMF). Ever since coming to power, Khan has been trying to solicit financial support from friendly countries including China, Saudi Arabia and the United Arab Emirates, but his efforts hardly yielded any result. From the day one, Finance Minister Asad Umar has been saying that Pakistan needs more than US$12 billion to keep imports and foreign debt servicing at sustainable level.
Negotiating funding with IMF was not deemed easy because of a host of reasons that include: 1) it will be Pakistan’s 13th agreement since late 1980s, 2) the United States enjoying significant control over IMF Board has emerged an opponent of lending to Pakistan and 3) Pakistan has been put at an odd position due to ongoing proxy wars in South Asia, Middle East and North Africa (MENA). The US keeps on singing ‘do more mantra’, Pakistan does not enjoy cordial relationship with three of its immediate neighbors; Afghanistan, India and Iran. It is evident to all and sundry that string will be attached to any assistance be it from IMF, United States, Saudi Arabia and China. In such a scenario, taking small bit from all the lenders may not be a bad idea.
All the political parties have initiated a debate, why should Pakistan approach IMF? Some of the critics say, “It may be true that Saudi package is handsome, but won’t address Pakistan’ all the woes. Having signed a deal with Saudi Arabia has reduced pressure on Pakistan substantially. It will also help it to negotiate a smaller facility with IMF with less stringent conditions”.
South Asia’s second-largest economy is facing balance-of-payments crisis due to bad policies of the previous two governments. These policies have resulted in dismal FDI inflow in the recent years, paltry exports and ever rising imports. Further woes have been added due to the hike in international crude oil prices. Though, remittances are on the rise but fall too short to bridge ever widening current account deficit.
Khan is an opponent of living on borrowed resources but has been forced to beg money from friendly countries and negotiate an assistance package with IMF, at softer terms. Opposition parties are also humiliating Khan, despite having used IMF facilities in their own regimes. It is but obvious that bigger the amount being asked, more stringent are the conditions. Let everyone explore explanations for the following questions:
How urgent is the problem?
Pakistan’s foreign exchange reserves have plunged to an alarming level, hinting towards virtual default if no immediate solution is found. Since friendly countries are not willing to give the desired amount, the incumbent government has no option but to go to the IMF, seeking help of the lender of last resort can reduce the pain. Shrinking reserves has also put Pak rupee under pressure, adding to the woes in two ways, increasing cost of imported items particularly energy products and eroding competitiveness of ‘Made in Pakistan’ Products. Therefore, the country has to boost its reserves to keep imports and debt servicing at sustainable levels.
Does Pakistan have other options?
Without mincing world Pakistan does not have too many options. Though, China was considered a savior but there is a negative propaganda going on “CPEC is another East India Company”. Therefore, both the countries have to be more careful. The US is opposing extension of funding to Pakistan for paying off Chinese loans. Whatever may be the reality, putting all the eggs in one basket is not advisable.
Would IMF be willing to extend yet another loan?
Let one point be very clear that IMF is in the business of lending money to the countries in distress, and it is always on the search for clients. Pakistan has been a regular and tested client that has not defaulted, though have been borrowing to pay off the loans in the past. Pakistan has enormous undiscovered/unexploited resources and a bit of lending can keep the lifeline. However, our own weaknesses, give opportunities to IMF to add the shackles.
What would a next bailout look like?
Reportedly, Pakistan needs more than $12 billion, Umar said in August. That would be higher than the biggest IMF package extended to Pakistan until now. The IMF typically provides three-year loan programs under its Extended Fund Facility to help countries facing balance-of-payments crises. The loans are often tied to economic targets that the government has to meet, for example curbing fiscal or current-account deficits, trimming inflation or allowing more flexibility in currency policy.
Till what time Pakistan keep on borrowing?
In 2013, the government of Nawaz Sharif signed an assistance program of US$6.6 billion disbursed over 36 months. During that time, the government mostly fell short of broadening the tax base or privatizing money-losing state-owned companies. Nevertheless, the economy rebounded after the IMF program, with growth accelerating, stocks soaring, the currency stabilizing and foreign-exchange reserves tripling to a record. All of that was undone last year as higher oil prices and the growth boom pushed up demand for imports, the current-account gap widened and reserves started to slide. To add to the insult PML-N government kept on borrowing from open market at much higher interest rates.
It is believed that IMF will extend the assistance program. However, it is yet to be seen how Khan’s government contains budget and current deficits. It has to boost exports, contain import, attract FDI and channelize remittances though the formal banking system.
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