Even as Pakistan tries to find a way out of its financial crisis, there is a lot of discussion regarding the pros and cons of the options available.
Some days ago, Pakistan’s Minister of Finance, Asad Umar announced that Pakistan could be taking a $12 billion bailout package from the Washington-based International Monetary Fund (IMF) for three years, as well as $5 billion from the Asian Development Bank and World Bank.
Having extremely high deficits around 6.6 percent of the GDP and fast depleting foreign exchange reserves, such an arrangement would get the economy through the immediate balance of payments crisis at hand. However, it is widely expected that the IMF delegation arriving on November 7th would want to place special conditions and get some policies changed.
Since a while, the IMF has been warning Pakistan that its financial risks have increased and need regulation as its medium-term debt repayment capacity is reducing due to current account and budget deficits.
Several issues are on top of the IMF list such as the viability of the China Pakistan Economic Corridor (CPEC), weak currency, hike in interest rate and possible sale of public sector enterprises going in loss. It has also been urging Pakistan to improve its anti-money laundering and counter-terrorism financing and drastic changes are expected in this latest IMF economic program.
To begin with, the government might have to carry out structural reforms under IMF monitoring and supervision. Moody’s has also recommended that the IMF would aid in macro-economic rebalancing and further the Pakistan government’s reforms agenda.
In the long run, Pakistan has to improve its economic outlook and work on becoming fiscally self-sufficient so that it does not have to rely on IMFSabena Siddiqui
Foreign exchange reserves
Noting that foreign exchange reserves were below the IMF minimum adequacy three-month threshold, the global ratings agency has highlighted that the IMF would “provide crucial policy support and technical assistance.”
Most of all, there is widespread concern in the media about the possible implications an IMF bailout might hold for ongoing CPEC projects in Pakistan. Vital for economic growth, these energy and infrastructure projects should proceed as planned notwithstanding any IMF measures.
Having taken financial help from the IMF 14 times since 1980, Pakistan’s last package with it ended just two years ago but there has never been any controversy. But this time round, the situation is different as Pakistan and China have launched the China-Pakistan Economic Corridor project under the Belt and Road Initiative and it is perceived as a potential clash of Sino-US interests.
In case the IMF disapproves of CPEC terms and conditions it might become difficult to implement projects as planned. Notably, Christine Lagarde has already emphasized that the IMF expects absolute transparency of all of Pakistan’s debt so that its debt sustainability can be determined.
Nevertheless, the redeeming factor is that China itself is also a member of the IMF and has endorsed and approved of Pakistan approaching it for a bailout. Thus, these fears might be somewhat extreme and CPEC should continue without any delay or impediment. It is also worth noting here that China has voting shares third in number within the IMF after the US and Japan.
For the record, the fact remains that only four out of the 22 CPEC projects are on concessional loan basis, while the rest are aid and equity-based investment for which Pakistan might have given a guarantee for annual profits. Out of these nine have been completed and 13 are underway. It is mostly previous loans from the IMF and others that constitute 47 percent of the total amount pending.
Notwithstanding the advantages of streamlining and fixing the economy, it is most likely going to be a punishing package for Pakistan and the rate of economic growth might slow down initially, prices of electricity and other utilities are expected to go up as well as taxes and inflation should spiral.
Expecting to find IMF conditions too difficult to manage, on second thought the Pakistan government is mulling over other options to reduce its reliance on the IMF deal.
Meeting a press delegation recently, Prime Minister Imran Khan apprised them that efforts are still being made to secure help from friendly countries and he hoped that the government would be able to fix economic issues with its policies. Having said that, a clearer picture should emerge in the next few weeks.
In the long run, Pakistan has to improve its economic outlook and work on becoming fiscally self-sufficient so that it does not have to rely on the IMF and other lenders. Once the present glitches are overcome, more focus is required on supporting domestic industries so that Pakistan’s overall exports can multiply.
Drastic measures may be required, such as introducing effective land reforms even though it is not a politically popular decision. Meanwhile, some favorable factors are also there, such as the CPEC projects, which will start entering in the operational phase and help bolster up the economy.
Sabena Siddiqui is a foreign affairs journalist and geopolitical analyst with special focus on the Belt and Road Initiative, CPEC and South Asia. She tweets @sabena_siddiqi.