Economic vulnerabilities

2018-08-03T02:38:49+05:00 Malik Muhammad Ashraf

In the backdrop of a precarious economic situation, especially in regards to the heavy repayments due on debt servicing and the statement of the likely finance minister of the Pakistan Tehreek-i-Insaf (PTI) government that the country had no choice other than seeking International Monetary Fund (IMF) bailout, the US Secretary of State Mike Pompeo has made a well calculated pre-emptive move to forestall the possibility of the world lending body acceding to the likely request by Pakistan. In a TV interview, he said “US looks forward to engagement with the government of Pakistan’s expected new Prime Minister Imran Khan but there is no rationale for a bailout that pays off Chinese loans to Pakistan. Make no mistake. We will be watching what IMF does.”

This is not a move in isolation. In fact the USA has taken to the higher notch the pressure tactics against Pakistan ever since the announcement of the new policy on Afghanistan and South Asia by President Trump, which Pakistan refused to go along with. The nosedive triggered by that development continues to precipitate. Earlier the US was also instrumental in pressurizing the Financial Action Task Force (FATF) to keep Pakistan in the grey list. The FATF had adopted the resolution moved by the US in that regard.

Apart from the strain on relations between the two countries stemming from the situation in Afghanistan and fight against terrorism, another irritating element in the ties between them is Pakistan’s tilt towards China particularly its joining the China-Pakistan Economic Corridor (CPEC). The US reaction clearly indicates that Washington was highly uncomfortable with CPEC, a flagship project of Belt and Road Initiative (BRI) launched by the Chinese President Xi Jin Ping for connecting Asia, Central Asia, Europe and Russia as it would increase influence of Beijing in those regions. The US and its allies are doing their utmost to stop China from attaining the honour of being the number one economic as well as military power, which many economist and military strategists predict that it will be by 2050 if it maintains the tempo of development that it has attained in recent years. India being strategic partner of the USA in this region is also employing all overt and covert machinations to thwart CPEC. The US and China are already in the midst of a trade war which indicates how high the stakes are.

It is pertinent to point out that US possesses 17 per cent weightage in the Executive Board of IMF and the European Union also toes the line taken by their ally. It is noteworthy that US has never before objected to any financial programme between Pakistan and the IMF. Since 1980 Pakistan has gone to IMF 14 times including $6.7 billion three year loan arrangement in 2013.

In view of the foregoing ground realities, the PTI government led by Imran Khan would be facing a tough and arduous challenge of maintaining a balance between Pakistan’s tilt toward China and good relations with USA in the domain of foreign relations.

It is beyond debate that Pakistan’s economic vulnerabilities are increasing. It is in dire need of dollar inflows to bridge its external financing gap; a situation which among other things is also attributable to political instability in the country for the last three years. It is believed that Pakistan would need at least $ 28 billion this year to fill that void. China provided $6.5 billion during the last fiscal year on different accounts to Pakistan and has agreed to make available $2 billion more but it could provide only a temporary breathing space for the country. Pakistan can only meet around 40 percent financing requirements with help from China but it will have to manage remaining 60 percent from other sources unless if the latter and some friendly countries like Saudi Arabia come forward for one-off support to tide off the immediate needs.

It is estimated that Pakistan would require $12 billion to pay off Chinese loans only, which will be due in the near future. Pakistan can get out of the tight situation also if the Chinese decide to defer the repayments for some period of time. But even in that case it would be a temporary relief. Pakistan would need to opt for a more reliable and productive arrangement not only to rectify its balance of payments but also to redirect the economy on the path of sustained development.

The permeating and considered view among the economists is that Pakistan should prefer to go back to the IMF. The IMF is a multilateral institution which is supposed to help its members when they are facing a balance of payment problem. However it makes sure that the money provided by it is utilized to facilitate implementation of a policy mix that restores macroeconomic stability and orchestrates structural reforms which help create an investment environment. The conditions imposed by IMF sometimes are politically unfeasible to implement, even for a popular government.

However since the new government already aims to introduce structural reforms as part of its agenda like elimination of circular debt and reforms in the power sector, it should not be difficult for it to find favour with the Fund and negotiating on the proposed structural reforms. In such an eventuality it will be preferable to seek assistance from the IMF. The advantage of associating with IMF is that it will also enable the World Bank and ADB and several other development partners to assist the government in its economic plans. The availability of resources will be needed for not just macroeconomic stability but for long-term growth and progress of social sectors. To rectify the economic malice which to a great extent is a sequel to the political instability in the country for the last three years, some tough decisions will have to be taken by the new government.

No doubt some other options are also available like drastic cuts in the government spending, imposition of new taxes, adjustment in the policy rate, controlled expansion in the domestic credit, limiting the government borrowing from the State Bank of Pakistan and controlling imports through regulatory customs duties which unfortunately cannot be used indiscriminately. But the dilemma is that these steps could be quite hard hitting. Perhaps a newly elected government may not opt for them immediately. Under the circumstances the best option seems to be seeking another arrangement with the IMF provided it could amicably deal with the reservations of the USA.

The writer is a freelance columnist.

Pakistan would need to opt for a more reliable and productive arrangement not only to rectify its balance of payments but also to redirect the economy on the path of sustained development.

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