ISLAMABAD: The International Monetary Fund expressed concern over Pakistan’s falling exchange reserves on Friday, but stopped short of echoing analysts’ warnings that it could face a new balance of payments crisis within months without a new loan package.
“There is still a balance of payments concern ... the foreign exchange reserves in the central bank have declined,” Jeffrey Franks, the regional adviser to the Fund on Pakistan told a news conference. “Foreign direct investment has fallen sharply but other capital inflows are also very weak.”
Franks said that Pakistan has not sought a new loan programme. However, if it did, it would have to implement strict measures for achieving economic targets needed to qualify for a new IMF programme, DawnNews reported.
Pakistan’s state bank currently has about $9 billion, enough to cover about two months’ worth of imports, if cash deposits in private dollar accounts are not counted, Franks said.
In 2008, the country averted a balance of payments crisis by securing an $11 billion IMF loan package. The IMF suspended the programme in 2011 after economic and reform targets were missed.
Some analysts have since warned about the prospect of a new balance of payments crisis. Pakistan owes the IMF just over $6.2 billion. It is due to repay $1.6 billion in the first six months of 2013, Franks said, a schedule that will strain reserves and may accelerate the slide of the rupee currency.
The rupee currently stands at 98.6 to the dollar, a depreciation of about 8 per cent over the course of 2012.
“Those reserves are not yet at a critical level but it’s important to address the policy – the underlying policy issue well before you get to the point where they become critical,” said Franks.
But the current government has failed to enact the reforms needed to boost reserves and qualify for a new IMF programme.
Broaden tax base, slash subsidies
The Fund wants Pakistan to broaden its narrow tax base and slash subsidies it says mainly benefit the wealthy.
Franks said further funding was contingent on a consensus being reached by political parties on comprehensive, permanent financial reforms and firm implementation of them.
Analysts think the IMF is unlikely to cut a deal soon as the government will probably lack the political will to take bold measures ahead of elections due this spring.
“The earliest the IMF can step in is in June,” said Sakib Sherani, a former finance ministry official who now heads the Macro Economic Insights research institute. “It’s a matter of a few months before there is a crisis.”
Mohammad Khan, a former commerce minister, said the looming election virtually ruled out any deal soon with the Fund.
“This is a government that has been irresponsible for five years, and now they are going to spend extravagantly to win these elections,” he said.
Most Pakistanis are already angry over the handling of the economy. Demonstrators cited a lack of jobs, high food prices and power cuts in mass protests this week led by cleric Tahirul Qadri demanding the government’s resignation.
The IMF predicts growth will touch 3.5 per cent in the fiscal year beginning in July against last year’s figure of 3.7 per cent and slow to three per cent the following year – less than half the rate needed to absorb the population entering the workforce.
Growth is hindered by chronic power cuts that have hurt key industries like textiles. Mismanagement of the power sector costs an estimated $1.5 billion ever year, according to the Pakistan Planning Commission.
The IMF estimates that inflation for this fiscal year will reach around 9.5 per cent against 10.8 per cent last year, Franks said. Wages have not kept up, causing widespread anger. Franks said the Fund wanted Pakistan to reduce its fiscal deficit – which could exceed seven per cent this year – by closing tax loopholes and cutting expenditure like energy subsidies.
“It’s not just the lack of energy, it’s the unreliability, the unpredictability,” said Franks. “That’s what’s holding your growth back more than any other thing.”