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Pakistan keeps its options open

Updated June 11, 2018


The political blow-back from the news that the interim caretakers are approaching the International Monetary Fund (IMF) for a bailout forced the government to clarify that contact had been made for a routine annual Article IV review and that no decision has yet been taken to return to the Fund’s fold to ease external sector pressures.

The caretaker government of Prime Minister Nasirul Mulk has two very challenging tasks for its limited tenure. Besides holding elections it will have to navigate the economy out of a tight corner to ensure future stability. The inclusion of Dr Shamshad Akhtar, an economist and former State Bank of Pakistan (SBP) governor, in the cabinet may help but the situation, in the opinion of experts, is too dire and complex for a quick fix with or without foreign agency involvement.

Pakistan’s external front vulnerabilities are worsening, as the current account deficit widens and foreign exchange reserves deplete to critical levels. The reserves, according to the SBP, clocked at around $10 billion at the start of this month. The total foreign exchange reserves are $16.4bn that includes $6.3bn held by commercial banks.

The caretaker government has two very challenging tasks for its limited tenure. Besides holding elections it will have to navigate the economy out of a tight corner to ensure future stability

Over the closing fiscal year 2018, despite some moderation in the growth of imports and a pickup in exports, the reserves continued to shrink due to the import bill and loan repayment obligations. Since July 2017 the central bank has bled $4.55bn and is expected to lose around $2bn in the next two months.

The business community resents the IMF. Mohammad Ali Tabba, CEO Lucky Cement and Chairman Pakistan Business Council (PBC), was brief in his response. “The IMF should be the last resort. The government should try to stimulate export growth to reduce the current account deficit”.

“The Fund strangulates growth in the name of stabilisation”, a businessman commented privately in Karachi. “Pakistan is back on the growth trajectory after a long time and the interim government should abstain from doing anything that disrupts the momentum”, he advised.

Ehsan Malik, CEO, the PBC, regretted the lack of seriousness of the successive governments in identifying and promoting productive agents to capitalise on the country’s development potential.

“In the last 28 years we have been in a relationship with the IMF 12 times under seven different governments. We need to understand policy problems that land us back to square one at intervals”.

“Still if the situation warrants an immediate inflow of hard currency I would prefer a multilateral lending institution over depending on the largesse of a single country”, he added hinting at China that has been projected by some circles as a better alternate to the IMF.

SBP Governor Tariq Bajwa, when approached avoided a direct comment. A written response from the was forwarded: “The decision to approach the IMF and its timing is warranted by a number of factors, such as detailed analysis of the current and future economic conditions, alternative options available and other management considerations. Given the macroeconomic situation no option should be ruled out. It is the federal government, nonetheless, which has to take a decision”.

A senior source in Islamabad, who was a key member of former Prime Minister Abbasi’s economic team, was amused by the 180 degree turn in the Ministry of Finance’s position on the issue of the IMF a day after the elected government’s exit.

“We know that bureaucracy in Pakistan has evolved into a class in itself that serves primarily its own interests. Still the conduct of the officers of the Ministry of Finance in particular continues to shock. They have a special soft spot for multilateral agencies and are often seen campaigning on their behalf. Does this have something to do with their post retirement ambitions? My guess is as good as yours”, he quipped.

Dr Hafiz Pasha, an economist and a former finance minister, found the current situation precarious. “The resentment of the private sector towards the IMF is perfectly justified. This segment is disproportionately burdened with taxes. The high cost of doing business has made them uncompetitive in the world market.

“Under the IMF programme the government will be forced to focus again on stabilisation. As the will to broaden the tax net is lacking, tax rates will be jacked up and the government may suspend the disbursement of refunds to meet imposed spending limits. The rising oil prices are already driving up the price of gasoline and energy rates.

The collective impact will render manufacturing unviable in Pakistan.

“The IMF may precondition the devaluation of the rupee to start engagement. This would discourage imports but increase the cost of foreign loan repayments.

“They will also demand details of Pakistan’s engagement with China under the CPEC, complete with terms and repayments schedules.

“There is also a danger that the country might be pressured to chop spending on the security apparatus”, Dr Pasha warned.

“The resentment of the private sector towards the IMF is perfectly justified. This segment is disproportionately burdened with taxes. Under the IMF programme the government will be forced to focus again on stabilisation. The collective impact will render manufacturing unviable in Pakistan” — Dr Hafiz Pasha, economist

In his recent book, ‘Growth and inequality in Pakistan’ Dr Pasha has dedicated a chapter on a critique of the IMF conduct in the country that he found to be politically motivated.

He cited evidence when the IMF, during a three year Extended Fund Facility (EFF) 2013-16, became exceedingly intrusive; exceeding its mandate in the country. He mentioned multiple waivers granted to the last Sharif government and adverse comments on security establishment, judiciary and CPEC in this regard.

Dr Nadeem Javed, chief economist Planning Commission thinks that clever manoeuvring can propel Pakistan out of the difficult patch. He suggested tweaking policies to capitalise on the commodity sector’s export potential.

“We must not get nervous. If we lose confidence in ourselves no one is going to bet on us or our economy. I am an incorrigible optimist. By the end of the current fiscal year when final data turns in the situation may actually turn out to be better than what the prophets of doom are projecting.

“Yes we may still fall short of $4-5bn. If we withdraw concessions and support the price of sugarcane, switch to sticky rice (that has a market in China) in suitable districts and ban import of unnecessary food products we can succeed in bringing the import bill down and improving export earnings in the span of six months.

“If we can negotiate a short term loan of another $1.5bn from China and return to the global financial market to raise the remainder by floating bonds, we can ride through without denting the growth momentum. To me it is doable. All it will take is some effort.”

“If the needful is done and the growth thrust is not compromised we are all set to post over 6pc GDP growth in FY2019”, Dr Nadeem told Dawn over phone from Islamabad.

A former governor of the SBP mocked this viewpoint. “I wonder who they are trying to fool. How delusional can you get? I don’t buy the rhetoric of deeper than the Arabian Sea and higher than the Himalayas’ friendship.

“China will demand nothing less than real assets in return for a bailout. To me returning to the IMF to ward off default is a foregone conclusion in the current circumstances. The sooner, therefore, we start engaging with donors the better it will be. If the situation is allowed to regress it will only compromise our position further when we finally sit across the negotiating table”, he said.

Published in Dawn, The Business and Finance Weekly, June 11th, 2018