IMF again?

The Pak Banker - - FRONT PAGE -

It seems the next govern­ment will be forced to go back to the IMF for a bailout pack­age to res­cue it from sink­ing deeper into the ris­ing sea of debt. Ac­cord­ing to ex­perts, it has be­come an es­tab­lished pat­tern for an out­go­ing govern­ment in Pak­istan to seek fresh loans to pay off the ex­ist­ing ones. This hap­pened in 2007-08 and 2012-13. This hap­pened twice dur­ing the 1990s and is likely to hap­pen this year again due to a wors­en­ing bal­ance of pay­ment po­si­tion.As per the Pak­istan Bu­reau of Sta­tis­tics data, dur­ing FY08, the fi­nal year of the PML-Q govern­ment, the cur­rent ac­count deficit shot up to $14.1 bil­lion (8.2% of gross do­mes­tic prod­uct - GDP) from $6.87 bil­lion (4.8% of GDP) as trade deficit in­creased to $20.91 bil­lion (12.3% of GDP) from $13.56 bil­lion (8.9% of GDP). The ru­pee-dol­lar par­ity went up from 60 in 2003 in­creased to 68.3 by the close of FY08. For­eign ex­change re­serves fell to $11.28 bil­lion at the end of FY08 from $15.18 bil­lion in one year. This forced the new govern­ment to sign a $7.6-bil­lion loan agree­ment with IMF, which later was en­hanced to $11.3 bil­lion. Again, in Septem­ber 2013, an­other agree­ment with the IMF was signed for $6.12-bil­lion as­sis­tance by the for­mer PML-N govern­ment within three months of tak­ing of­fice.

What is the state of the econ­omy now? In the first nine months of the cur­rent fis­cal year (July-March FY18), $12.46-bil­lion cur­rent ac­count deficit was reg­is­tered com­pared with $8.35 bil­lion in the cor­re­spond­ing pe­riod of FY17, de­not­ing a rise of 49.22%. The cur­rent ac­count deficit in­cluded $22.30 bil­lion in trade deficit com­pared with $18.47 bil­lion deficit recorded in July-March FY17, which rep­re­sented 20.68% growth.

In its re­port on Pak­istan's econ­omy re­leased in March 2018, the IMF pro­jected $15.7 bil­lion (4.8% of GDP) of cur­rent ac­count deficit for the full fi­nan­cial year. It fore­cast 10% ex­port growth and 10.2% im­port growth, which would take ex­ports to $22.46 bil­lion and im­ports to $58.22 bil­lion, thus re­sult­ing in $35.76-bil­lion trade deficit. But the July-March FY18 data sug­gests that the IMF un­der­es­ti­mated the size of cur­rent ac­count and trade deficits. Based on GDP growth of 5.8%, as fore­cast by the govern­ment for FY18, the pro­jected GDP size for the out­go­ing fis­cal year is $322.65 bil­lion (FY17 GDP was $304.97 bil­lion).

The wors­en­ing cur­rent ac­count bal­ance has af­fected both the ex­change rate sta­bil­ity and for­eign ex­change re­serves. Af­ter nearly four years of man­aged sta­bil­ity, the govern­ment al­lowed the ru­pee to de­pre­ci­ate by around five per­cent­age points twice - in De­cem­ber 2017 and March 2018. One US dol­lar trades for over Rs120 in the open mar­ket. Liq­uid for­eign cur­rency re­serves avail­able with the cen­tral bank have gone down to $ 11.16 bil­lion from $ 16.14 bil­lion in May 2017, a loss of nearly $ 5 bil­lion in less than a year.

Faced with in­suf­fi­cient FDI in­flows, the govern­ment has had to rely mainly on debt- cre­at­ing in­stru­ments, such as sale of bonds and com­mer­cial loans, on which in­ter­est rate is rel­a­tively high, to meet the cur­rent ac­count deficit. Pub­lic ex­ter­nal debt, which was $ 64.48 bil­lion at the close of 2016, had gone up to $ 73.72 bil­lion at the end of 2017. In the first seven months of FY18, the govern­ment bor­rowed $ 6.6 bil­lion. What is the way out? An in­crease in ex­ports and FDI is the key to re­duc­ing the ex­ter­nal ac­count deficit. But there are no in­di­ca­tions of this hap­pen­ing any time soon. This leaves the only op­tion of go­ing to the IMF. But as they say, there is no free lunch. IMF fa­cil­ity comes with strings and tough con­di­tion­al­i­ties. Need­less to say, the next govern­ment will be faced with the dif­fi­cult task of de­cid­ing whether or not to con­tract IMF loans and on what terms.

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