ISLAMABAD: Pakistan’s political leadership has decided to delay approaching the IMF for a new bailout package, despite warnings by some experts that the time was running out.
According to official minutes of important meetings of top economic managers, a copy of which is available with The News, the political leadership has preferred the advice of incumbent Finance Minister Saleem Mandviwalla and Governor State Bank of Pakistan Yaseen Anwar that there would be no balance of payments crisis, as the foreign currency reserves were ‘manageable’.
Documents reveal that there was a clear cut division among the economic team during the last couple of weeks under the former finance minister Dr Abdul Hafeez Shaikh. “Now the stage has been set whereas the budget deficit cannot be controlled crossing 8 percent of GDP at a time when foreign inflows have shrunk to the lowest level, which means that the printing machine of SBP will be swung at full pace keeping in view the liquidity crunch being faced by the banking sector of the country,” a senior official who knows economy confided to The News in background discussions here on Thursday.
However, according to the minutes of an official meeting, former finance minister Dr Abdul Hafeez Sheikh, former secretary finance Abdul Wajid Rana and incumbent Deputy Chairman Planning Commission Dr Nadeemul Haq supported the idea of obtaining a fresh bailout package prior to the eruption of crisis on balance of payments side that was expected in the last quarter (April-June) period of the current fiscal year.
Former secretary finance Abdul Wajid Rana had stated in the meeting that low foreign inflows and debt repayment obligations between January and June 2013 would be standing at around $4 billion that would put pressure on exchange rate and foreign exchange reserves.
According to his assessment, the April-June 2013 period would be critical and there could be tremendous pressure on balance of payments right during the transition period which may lead to October 2008 situation.
“Therefore, it would be important to take measures now including taking negotiations with the IMF for a 3 year program to a closure before announcement of the elections,” Wajid Rana stated in the meeting and added that in his view the proposed Fund program would not be very stringent and implementable as it was based upon two pillars, including mobilisation of revenues of 3.5 percent of GDP in three year with upfront jacking up revenues by 1.5 percent of the GDP and energy sector reforms by withdrawing subsidies.
According to the minutes, the Deputy Chairman Planning Commission Dr Nadeemul Haq pointed out that both investment and growth were plummeting in Pakistan, as investment had reached its lowest ebb while the central bank was not clear about its policy anchor.
The monetary easing has not been translated to boost investment and there is a need to consider the adjustment in variables and take corrective measures to encourage the private sector and investment climate.
Dr Nadeemul Haq asked the governor SBP how long the bank could continue to defend the currency with low reserves and adverse external environment, especially when the central bank had already lost $1.4 billion in defending the currency.
Giving the analogy of high cholesterol and heart attack, Dr Haq stated in the confidential meeting that the patient should start acting when he sees symptoms of high cholesterol rather than waiting until the heart attack actually happens.
He suggested that clearly one could see the balance of payment crisis on the horizon; therefore, instead of waiting it to happen, we need to pre-empt the situation and take the necessary measures now to stabilise the economy and the political environment rather than letting the crisis to occur. Dr Haq also asked the governor SBP to “let us know if they really have an alternative plan to deal with the arising situation if it is not inclined to go for a Fund program”.
He also pointed out that the SBP cannot hide behind the fact that the main problem is on the fiscal side and not monetary; therefore, the government should take care of the fiscal policy only. He said the SBP cannot absolve itself completely, as a high fiscal deficit would mean borrowing from the SBP/banking sector leading to high money growth resulting into high inflation.
The governor SBP said in the meeting that he was of the firm view that the IMF program at this moment would be premature and reiterated that conditions attached by the Fund were harsh. He said the foreign currency reserves position was challenging but manageable and the foreign reserves would be standing in the range of $7.5 to $8.5 billion by end June 2013; therefore, there would be no balance of payment crisis as additional inflows would come in as a result of FDI from Saudis, export of sugar and wheat and currency swaps.
According to the minutes, when the governor SBP was challenged for his assessment as well as additional $6.5 billion debt repayment during FY 2014, Yaseen Anwar said by that time currency swaps with China and Turkey would be fully operational and there would be no crisis at all.
But former secretary finance Wajid Rana gave arguments to establish its point by stating that the only option at this stage was to lock in the Fund program to avoid any pressure on balance of payment during the tenure of political transition happening in the country.
This scribe contacted Adviser to Finance Ministry Rana Assad Amin for an official viewpoint on the yawning budget deficit that might reach 8 percent of GDP, he said they would brief the cabinet next week about the revision in budget deficit target, which would be curtailed at around 6 percent of GDP.
He said Finance Minister Saleem Mandviwalla had convened a special meeting on coming Saturday to resolve the problem of circular debt, which had again piled up in the range of Rs450 to Rs500 billion in totality. During this meeting, a mechanism will be devised to ensure a permanent solution, he concluded.