Damage done
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.