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Where will the money go?

December 20, 2012

THE receipt of another $700m under the Coalition Support Funds comes at an important time for Pakistan. With reserves eroding, and the outlook on the external sector getting darker, any inflow at this time is helpful. But here the good news ends. After this receipt, further inflows are not visible on the horizon. The 3G auction is up in the air, efforts to cajole a balance payment out of Etisalat are under way but chances of success look slim. The rate at which the country’s reserves are falling is set to accelerate further as large debt repayments become due in the second half of the fiscal year, and where $700m is clearly helpful in meeting these obligations, the amount by itself is insufficient to strengthen the outlook. Hence, the unfortunate search for additional inflows continues.

The bigger question is what will we do with the money? The last large inflow, a $1.1bn payment in August, was used to retire money borrowed from the State Bank. It also helped bring our current account deficit into surplus briefly. Buoyed by these developments, the State Bank found comfort in the numbers and gave away a full percentage and half cut in interest rates. The beneficiary was the government, since industry has yet to use the declining interest rate environment to restart investment. So what should be spelt out in clear terms is what these inflows will be utilised for. It should also be made clear at this stage that once the funds arrive, they will produce a small and very fleeting uptick in our external sector, and in some of our fiscal indicators. That small increase must not be used to pop any corks, and there should be no haste in putting the funds to work. Let’s restrain the enthusiasm a little, and recall that the long road ahead is still there, and while foreign inflows are important it will take more than these to meet the challenge. Foreign inflows must be accompanied by restructuring of the domestic economy and tough fiscal reforms to fend off a balance-of-payment crisis.