Dam­age done

The Pak Banker - - 4EDITORIAL - Dr Ash­faque H Khan

THERE ap­pears to be a se­ri­ous dis­con­nect be­tween most of the an­a­lysts, in­clud­ing my­self, and the gov­er­nor of the State Bank of Pak­istan (SBP) on the emerg­ing debt re­pay­ment cri­sis. On the is­sue of the loom­ing debt re­pay­ment cri­sis and over the ques­tion of whether to seek IMF re­sources once again, the gov­er­nor's view was di­a­met­ri­cally op­po­site to that of the former fi­nance team of the de­part­ing government.

Given the debt re­pay­ment obli­ga­tions that are due by June 2013 on the one hand and the dry­ing up of ex­ter­nal in­flows and rapidly de­clin­ing for­eign ex­change re­serves on the other, the team was of the opin­ion that Pak­istan should seek a fresh bailout package from the IMF to pre­vent a full-blown bal­ance of pay­ment cri­sis. The gov­er­nor was of the opin­ion that although the for­eign ex­change re­serves' po­si­tion was chal­leng­ing, it was still man­age­able: there­fore, there would be no debt re­pay- ment cri­sis and thereby no point to seek­ing IMF as­sis­tance for the time be­ing.

The po­lit­i­cal lead­er­ship ob­vi­ously pre­ferred the view of the SBP gov­er­nor and did not seek any fi­nan­cial re­sources from the IMF. Why is there so much dis­con­nect over the emerg­ing bal­ance of pay­ment cri­sis?

The SBP's for­eign ex­change re­serves stood at $7.655 bil­lion on March 8, 2013. The SBP has lost al­most $2.5 bil­lion in re­serve since the be­gin­ning of the cur­rent fis­cal year and al­most $6.5 bil­lion since July 2011.

It is to be noted that the cur­rent SBP re­serves are over stated to the ex­tent of $2.3 bil­lion as it has bor­rowed this amount from com­mer­cial banks in the for­ward mar­ket. Hence, Pak­istan's for­eign ex­change re­serves are dou­ble counted to the ex­tent of $2.3 bil­lion. The SBP re­serves net of for­ward buy­ing stood at $5.4 bil­lion on March 8.

On the pay­ment side, Pak­istan will have to re­pay $6.458 bil­lion till De­cem­ber 2013. Pak­istan has made a small pay­ment of $12 mil­lion to the IMF on March 15 and will be paying $144 mil­lion on March 28; $144 mil­lion in April; $560 mil­lion in May and $267 mil­lion in June.

In other words, dur­ing the care­taker regime (March 16 to June 30, 2013) Pak­istan will be paying $1150 mil­lion to the IMF alone from its cur­rent level of re­serves ($5.4 bil­lion ad­just­ing for for­ward buy­ing). Lit­tle in­flows are ex­pected dur­ing the pe­riod; hence, gov­er­nor SBP's op­ti­mism not­with­stand­ing, the SBP re­serves are ex­pected to de­cline to a dan­ger­ously low level (al­most $4.3 bil­lion) by end-June 2013.

The newly elected government will be fac­ing a se­ri­ous chal­lenge of in­sol­vency if it be­gins its ten­ure with $4.3 bil­lion in for­eign ex­change re­serves. They will have to re­pay al­most $4.5 bil­lion, in­clud- ing $2 bil­lion to the IMF alone dur­ing July-De­cem­ber 2013. With­out be­ing emo­tional, care­ful think­ing will be re­quired on the part of the new government to pre­vent a full-blown bal­ance of pay­ment cri­sis as well as the col­lapse of the econ­omy.

In a re­cent in­ter­view with Reuters (March 7), Werner Liepach, the coun­try di­rec­tor of the Asian Devel­op­ment Bank cat­e­gor­i­cally stated that Pak­istan's bal­ance of pay­ment sit­u­a­tion has en­tered a crit­i­cal zone and that it will need $6-9 bil­lion dur­ing the cur­rent cal­en­dar years to shield its econ­omy. He also ad­vised that Pak­istan should seek an­other IMF pro­gramme to pre­vent the cri­sis as soon as pos­si­ble.

What are the op­tions avail­able to Pak­istan? The newly elected government can man­age to bring $6-7 bil­lion within six months of its ten­ure. Is it pos­si­ble? Can friendly and broth­erly coun­tries in­ject this much amount to bail Pak­istan out of the cri­sis? Can Pak­istan as­sure friendly and broth­erly coun­tries that it will bring its house in or­der and un­der­take wide rang­ing eco­nomic re­forms? If the an­swer is yes, then Pak­istan does not re­quire a new IMF pro­gramme.

The chances how­ever are slim for the above­men­tioned sce­nar­ios to be true. The next op­tion is to seek yet an­other IMF pro­gramme to pre­vent the cri­sis; for this, the newly elected government would re­quire a cred­i­ble eco­nomic team.

The size and the con­di­tion­al­i­ties of the IMF pro­gramme would be cru­cial. The cost of ad­just­ment would de­pend upon whether Pak­istan goes to the IMF when it is al­ready in the cri­sis or it goes to the IMF to pre­vent the cri­sis. My po­si­tion since Septem­ber 2011 has been that Pak­istan should seek an­other bailout package from the IMF as soon as pos­si­ble to min­imise the cost of ad­just­ment.

The out­go­ing government for its ulte- rior mo­tives con­tin­ued to de­fer se­ri­ous ne­go­ti­a­tion with the IMF for a new pro­gramme. The gov­er­nor SBP mis­guided the po­lit­i­cal lead­er­ship by pre­sent­ing a rosy pic­ture of the econ­omy in gen­eral and for­eign ex­change re­serves in par­tic­u­lar.

Or, he read the mind of the po­lit­i­cal lead­er­ship and went along with them. They did not seek the IMF pro­gramme be­cause they knew very well that while be­ing in the pro­gramme it would be dif­fi­cult for them to in­dulge in fi­nan­cial harakiri and de­stroy the coun­try's fi­nances through a fi­nan­cial tsunami dur­ing the last few days of their ten­ure with a hope of 'win­ning' the elec­tions.

The gov­er­nor must have as­sured the government that they had enough re­serves to sur­vive till March 16 and that what­ever hap­pens to the econ­omy there­after will not be their re­spon­si­bil­ity, the care­taker and the new gov­ern­ments will face the mu­sic.

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