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THE government appears to be working on a plan-B to meet its foreign exchange obligations for the current fiscal year and yet maintain a cushion in foreign exchange reserves enough to cover two and half months of imports on completion of the fiscal year on June 30.

“The State Bank of Pakistan (SBP) will have $12.5 billion (reserves)” at the end of June 2018, announced Prime Minister’s Adviser on Finance and Revenue Dr Miftah Ismail, but said he could not give all the details at this stage. “This will come through borrowing obviously”, he said.

That means that even if it is for short term periods, the government has to ensure $2bn to $2.5bn from now on to June 30, all through commercial and bilateral channels — banks and friendly countries. The current account deficit in the first seven months (July-January) is already beyond $9bn and current SBP reserves are little over $13bn.

Islamabad changed its strategy of going to the international bond market for a $1.5bn tap up on its previous bond, issued in December 2017, as Pakistan has faced US-prompted challenges at the Financial Action Task Force (FATF) and long time friends have opted to protect their own interests.

Riyadh expects to become a full-time member of FATF next year despite securing contingents of army personnel from Islamabad and Beijing will be eying the post of FATF vice president although it is expected to continue investing in Pakistan.

The US and European investors can be more easily influenced by the Trump administration which can have negative repercussions for the country in terms of cost and image. About two weeks ago Dr Ismail withdrew from the cabinet a proposal to launch another international bond.

In the short term, however, the Trump administration has weakened Pakistan’s domestic policy manoeuvrability. Instead being perceived as taking action against extremism as part of a national action plan supported by all stakeholders and the public; the move contributed to forwarding a narrative that the authorities were American stooges and were taking action under external pressure.

This coincided with post-programme monitoring of the International Monetary Fund (IMF) which did not release its full evaluation staff report on Pakistan’s economy due to a pending formal consent of the Prime Minister, who also holds the portfolio of the finance minister. The IMF cannot publish full reports without explicit permission for almost a month after the executive board meeting.

In its statement, however, the board noted favourable growth momentum but showed concern over the weakening macroeconomic situation, including widening external and fiscal imbalances, reduction in foreign exchange reserves and emerging risks to economic and financial outlook amid a sensitive political transition.

It advised the outgoing authorities to refocus on near-term policies to preserve macroeconomic stability and get back to fiscal discipline to minimise risks, economic distortions and public sector losses.

The Fund’s report estimated real GDP to grow by 5.6pc during fiscal year 2017-18 due to improved power supply, investment related to the China-Pakistan Economic Corridor (CPEC), strong consumption growth and ongoing recovery in agriculture.

According to Dr Miftah Ismail the fiscal deficit will be kept below 5.2pc at all costs while the IMF executive board estimated it at 5.5pc of GDP, with risks towards a higher deficit ahead of upcoming general elections.

The IMF board also asked Islamabad to strengthen fiscal discipline through additional revenue measures and efforts to contain current expenditure — a difficult task indeed for a political government that was going to elections shortly amid an adverse political and institutional environment. It is almost unthinkable to wish for deep rooted structural reforms at this stage.

Dr Miftah, however, agrees that the current account deficit is likely to widen to around five per cent of GDP during the current fiscal year as a high growth trajectory and rapid implementation of energy and infrastructure projects have increased external sector pressure.

The current account deficit in July 2017 - January 2018 stands at $9.16bn, he said but added it was indicative of higher foreign savings.

The robust import demand was led by capital goods (20pc), petroleum products (23pc) and industrial raw materials (9pc) and highlighted significant investment in productive activities.

He said regulatory duties were helping contain non-essential imports and the export package had helped in increasing exports by 11.7pc from July-February 2017-18 as compared to the same period last year. More importantly, exports in February increased by 16.5pc compared to 9.7pc growth in imports and the pattern going forward is expected to provide some respite.

Dr Ismail has promised that a necessary and long pending exchange rate adjustment had been made and the path of a flexible exchange rate policy will continue. He concedes that pressure had increased on reserves that peaked to $24.5bn by end-2016 and has since been declining as a result of higher imports of growth enhancing capital equipment and machinery. But, at the same time, financing is being arranged to ensure that the pressure on reserves is minimised.

Further, remittances are expected to stay strong and grow to around $20bn by end of the current fiscal year while project financing continues to be strongly supported by multilaterals even though there are problems with programme loans.

Notwithstanding, he believed commercial borrowing has also remained strong and at manageable mark-up rates.

In the medium term as the projects become fully functional and the economy’s productive capacity improves, growth is likely to pick up above six per cent, moderating external pressures on the economy.

The cost of a quick growth recovery has to come in the shape of two-three years of pressure. But then that is the trade-off.

Published in Dawn, The Business and Finance Weekly, March 12th, 2018