Pakistan Tehreek-e-Insaf (PTI)-led National Assembly elections that were held on 25 July 2018. They are set to take the oath on 18 August 2018 to form the next government, which will inherit an economy facing multi-pronged crises.

The economy of Pakistan had a minor recovery at the end of July nonetheless, the Pakistani rupee plummeted by 20 percent in the past seven months owing to a balance of payment crisis looming over the drooling foreign exchange reserves. The rupee touched 130 against the U.S. dollar just a couple of days before election day, recovering to around 122 within a week, on news tip that Beijing had agreed to give Islamabad a $2 billion as a loan.

During the past 12 months, the performance of Pakistan stock exchange had gone from being Asia’s best market to the world’s worst. The stock exchange hit this year’s bottom in July, two weeks before the elections.

In the last fiscal year, the central bank of Pakistan reported a current account deficit of $18 billion, which is around 5.7 percent of the GDP. Pakistan national budget deficit had crossed 2 trillion rupees. The government owes a trillion rupees more in circular debt.

Given the magnitude of financial figures, Pakistan is left with few options but to go to the International Monetary Fund (IMF) for a bailout package – this would be 13th such bailout package for Pakistan since the 1980s.

Asad Umar, expected to take over the ministry of finance, has reiterated that within the next six weeks his ministry will decide on the source of over $12 billion, after his taking over.

“IMF is the only international financial institution that gives monetary bailout packages, and not Asian Development Bank [ADB], Islamic Development Bank [IDB], or Central Banks of China or Saudi Arabia,” as per economic theorist and political analyst Farrukh Saleem.

“Pakistan has Rs4 trillion worth of T-bills set to expire in four months – and needs a rollover – additionally require $8 billion worth of foreign debt servicing over the next 12 months. This will force Pakistan to go for the IMF bailout,” he reiterated.

In April, the then-advisor to the prime minister on revenue and finance, Miftah Ismail, visited the United States for meetings over countering terror financing. He had also met the official of IMF at the time to find modalities for a possible bailout.

While Mr. Ismail had repeatedly denied having any discussions with respect to a bailout loan from the IMF while in the United States. However, contradicting Mr. Ismailoutgoing Minister of Finance Rana Afzal Khan confirmed that there were talks on the subject with IMF.

“The IMF sets certain conditions for monitoring use of its finances. With the IMF, our discussions were restricted to what Pakistan had agreed with them and the deviations Pakistan had to make because of the changing scenarios [over the previous year],” Khan said.

“When the then, PM Nawaz Sharif was removed, financial indicators in Pakistan changed along with the perception of the developing economy changed and foreign companies became uncomfortable because they thought Pakistan is going into another political crisis,” he added.

Rana Afzal Khan also accepted that his predecessor, Mr. Ishaq Dar’s policy of creating an artificial price of the rupee against the dollar, which hovered around the 100 mark, was flawed. It is this artificial pricing that eventually saw a sudden plunge in the rupee’s value.

“The value of a currency depends on market sentiments and prevailing political sentiments. I had always felt the price between 115 and 120. So that’s where it is, but now it will depend on how the finance ministry manages it,” Mr. Rana Afzal Khan said.

While critics debate over the outgoing Pakistan Muslim League-Nawaz (PML-N) government should have gone to the IMF earlier to avoid the current economic crisis in the first half of the year 2017, but Mr. Khan conceded it wasn’t politically feasible.

With the ministry currently aiming at the bailout, it is the conditions that IMF imposes that may be crucial for the Islamic Republic of Pakistan. First of all, IMF may want to conduct a debt sustainability analysis under its instructions to determine whether Pakistan can sustain the loan.

“It will be first such analysis carried out by Pakistan,” said Farrukh Saleem. He believes, “In addition to the debt sustainability analysis, and the usual demand for higher energy prices and taxes, the IMF may also demand transparency for transactions related to the China-Pakistan Economic Corridor (CPEC).”

Pakistan’s balance of payment crisis stems from a rising trade deficit, which in turn results from rising imports. It touched a record $60.898 billion at the end of the last fiscal year. It should be noted that Pakistan does not export any kind of capital goods or services. Thus, there is no scope of ever covering trade deficit in the near term. Thus, recovery is nearly impossible.

As per Salman Shah, “China has a huge role in increasing trade deficit of Pakistan – Pakistan’s imports from China are significantly higher compared to its own exports back China. This is one of the prime reasons why Pakistan has been trying recently to revise its free trade agreement with China.”

It is Islamabad’s reliance on China, and inflow of CPEC funds, that prompted U.S. Secretary of State Mike Pompeo to issue a warning to the IMF against a bailout package that would eventually aid China.

Secretary of State 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.”.

Salman Shah believes that Pompeo has “embarrassed” the IMF. “He is implying that they work on U.S. dictation, which eventually could push the IMF to show its independence. Mr. Pompeo feels that the IMF loan would further increase the cooperation between Pakistan and China and will give better results to Pakistan.”

While Mr. Shah doesn’t believe the IMF would set any conditions that could bar Pakistan from trading with China, he concedes that a “diplomatic predicament” has been created.

“Of course there is a conflict of interest because in the broader scale it is a fight between the U.S. and China, which Pakistan is now stuck in. That’s what happens when you have the begging bowl in your hand,” Farrukh Saleem said.


16 Aug 2018/Thursday            Written by 

                                             Mohd Tahir Shafi