FINANCE Minister Asad Umar’s recent statement that the imminent balance of payments crisis is over, coincided with the arrival of the International Monetary Fund (IMF) team in Islamabad to assess the volume of credit facility the country would need.

The finance minister’s optimism was perhaps based on a Saudi pledge of a $6 billion facility coupled with the hope of a prompt Chinese relief package, a drop in the trade deficit to $11.8bn and a jump in remittances by over 15 per cent to $7.4bn during July-October.

The minister seemed to expect $5-6bn from the Fund while the government tried to step up efforts to attract ‘investment-led export growth’.

But the Chinese package, according a media report, requires further bilateral discussions with an unspecified time frame. The talks the finance secretary and central bank governor held with Chinese officials following Prime Minister Imran Khan’s visit to China remained inconclusive. How it will impact the volume of the IMF credit facility is not clear.

The key issue here, however, is: will the external economic assistance and investment help reduce foreign dependence or will it further enhance it?

The current stipulated financial inflows are in the nature of firefighting — as witnessed in the past — with no durable solution for ever mounting trade and current account deficits that are financed increasingly by domestic and foreign government borrowings.

The country’s total debt and liabilities — including borrowing by public sector enterprises, loans for commodity operations and external liabilities — were at a record of 86.8pc of GDP at the end of June 2018. According to political economist Akbar Zaidi, “Pakistan needs to return loans of $12.4bn in the remaining fiscal year of which $5.6bn are short-term loans.”

State Bank researchers say more often such ‘short-term stop-gap measures’ provide relief for a while but make it less expedient to address underlying issues of structural imbalances. They point out that external sector problems have now acquired urgency owing to the rising unsustainable level of public debt.

While maintaining that debt was indispensable Mr Umar also recently acknowledged in an interview with a TV channel that “the government should borrow less”. He pointed out that a large amount of the loan, instead of being utilised for the welfare of the masses, was going directly to pay the interest on these loans.

However, a government consultant explains that the recourse to the IMF is not motivated so much by dollar needs as it is to send a positive signal to other international financial institutions (IFIs) and international markets that the Fund is ‘monitoring the reforms’ to ease the pressure on the external sector.

So, the IMF programme is expected to widen the doors of the World Bank and Asian Development Bank for Pakistan to borrow more. And an economist, who is a member of the Economic Advisory Council, says borrowings for productive purposes is not inflationary. Apparently, while this may be true for certain countries, it is not universally applicable as in the case of Pakistan.

The latest central bank annual report says “macroeconomic imbalances occur as growth picks up making it challenging to maintain equilibrium of low inflation and higher growth.” Inflation has hit seven per cent and the IMF’s reported forecast is that it would surge to 14pc by June 2019.

No less important, core inflation, which has implications for central bank policy rate as well as fixed investments, is at 8.2pc. According to monetary experts, a headline inflation rate over six per cent has an adverse impact on economic growth.

What we are witnessing is a trajectory of receding growth with high inflation, something witnessed in past growth cycles but now, officials say, with a difference as heavy investment in energy and infrastructure sector will help increase productivity in farms and factories.

The main reason attributed for such cycles now and often has been low investment and the economy’s limited capacity to produce. Most of the spurts in growth have been consumption-driven with long-term issues in investment, industrialisation, trade and resource mobilisation remaining unresolved.

With a fast depreciating exchange rate , the rupee cost of foreign borrowings will go up whether it is cheap loan from the IMF, repayment of expected one-year $3bn Saudi deposit for balance of payments support or a Chinese loans.This may lead to widening fiscal and current account deficit.

Official data show that of the Rs2 trillion expense on external public debt during FY 2018, around Rs1.1tr was due to the rupee depreciation against dollar and appreciation of major currencies against the greenback.

And interest payments have started increasing on surging external debt stocks owing to the upward LIBOR trend. The impact of appreciation of other currencies against the dollar on the external public debt was recorded at $407 million in FY2018.

Central bankers say fresh loans recently acquired on floating rates and of relatively short-term maturity have increased the roll over and interest rate risks.

Pakistan’s foreign dependence cannot be brought to sustainable levels without a comprehensive long-term strategy of economic self-reliance by putting agriculture and industry on its feet and building an independent economy.

Published in Dawn, The Business and Finance Weekly, November 19th, 2018