PAKISTAN ECONOMY: ON THE PATH OF CATASTROPHE

“Pakistan’s gross external financing needs for 2018-19 are likely to fall in the range of $23 billion to $28 billion. Pakistan’s biggest challenge is to contain the import bill that is estimated to surge to $60.9 billion in fiscal year 2018-19”.

Pakistan, South Asia’s second-largest economy is facing its latest balance-of-payments crisis as imports for Chinese-financed infrastructure projects rises while its exports lag far behind. Its imports bill is more than double of its exports earnings. Its total export earnings, including remittances from overseas, were placed at the US $ 24.7 billion, whereas, total imports bill was at the US $ 55.8 billion; as per reports released by State Bank of Pakistan (SBP). Despite a number of steps taken by the government to reduce the imports in FY18, the imports remained bullish with a total bill of $55.8bn, according to a balance of payments reported by the SBP. However, the exports increased to $24.7bn in FY18 from $22bn in the previous fiscal year. The huge traded deficit of about $37bn puts enormous pressure on the external account of the country and has bitterly inflicted the exchange rate. Now Pakistan has no other option but to ask for a bailout from International Monetary Fund (IMF).

This will be 13th bailout asked by Pakistan from IMF since the late 1980s and 22nd from the time of its birth. The IMF is placing extremely stringent conditions for the bail-out package that may severely impact employment generation and reduce the income of farmers already fighting the abject poverty. On the other hand, the biggest stakeholder in the IMF, the USA, has been watching every move. “Make no mistake,” Secretary of State Mike Pompeo said, “we will be watching what the IMF does.” Mr. Pompeo objected to the idea of money from the fund being used by Pakistan to pay back Chinese loans. He further said, “There’s no rationale for IMF tax dollars and associated with those American dollars that are part of the IMF funding for those to go to bail out Chinese bondholders or China itself.”

Pakistan’s economy, it seems, has become yet another battlefield between the United States and China. In a major development, China has agreed to immediately give a $2 billion loan to Pakistan, a move meant to arrest the sliding official foreign currency reserves and provide much-needed breathing space to the new government led by Mr. Imran Khan of Pakistan Tehrik-e-Insaf or PTI. The amount will push SBP-held foreign currency reserves past $10 billion. But mostly it will be the accumulation of borrowed amount from “friendly” countries.

In an SOS call, Pakistan was seeking help from its best friends: China and Saudi Arabia. The Saudis gave Pakistan much needed succour of US $ 6 billion, primarily to assist it in two counts, seek bailout package (more loans) from IMF and meet its precarious balance of payment crises. Saudi Arabia has agreed to give Pakistan $3 billion in foreign currency support for a year and a further loan worth up to $3 billion in deferred payments for oil imports to help stave off a current account crisis. Pakistan was not having FER (foreign exchange reserve) sufficient even for two weeks’ import. The IMF reservations are due to CPEC agreement between Pakistan and China. In the past, the IMF expressed concerns over the sheer size of CPEC and its implications on Pakistan’s external debt repayments. Pakistan currently owes $4.8 billion to the IMF that exposes it to the lender’s scrutiny.

Pakistan has a perpetual problem of balance of payment since long. In 2014, during the Pakistan Muslim League-Nawaz (PML-N) government, Pakistan received a $1.5 billion grant from Saudi Arabia. The previous government also requested both China and Saudi Arabia to provide $2 billion each to stabilise official foreign currency reserves. While Chinese financial institutions provided commercial loans, both countries declined to extend a bailout. Pakistan faces a mammoth task of arranging around $11 billion to fill its external financing gap in the ongoing fiscal year. The Ministry of Finance, IMF and independent economists have assessed Pakistan’s gross external financing needs for 2018-19 to fall in the range of $23 billion to $28 billion. Pakistan’s biggest challenge is to contain the import bill that is estimated to surge to $60.9 billion in the fiscal year 2018-19.

The apolitical establishments within Pakistan have severely criticised the state of affairs of an economy and blamed it on wrong priorities of the government. The Dawn writes “And, if our public discourse and policies remain the same, we will, without doubt, keep knocking at IMF’s doors every few years (or some other lender for that matter).” Pakistan has to truly look within to avert its looming economic catastrophe. In its own interest, it has to shift focus from exporting extremism to encouraging exports, from hard line to hard economics and from rhetoric to realities.

10 Dec 2018/Monday                               Written by Azadazraq