How does Pakistan avoid a fiscal crisis has been the topic of much speculation in recent weeks? According to reports, Pakistan has officially turned to friendly countries, namely Saudi Arabia and China, to bridge the finance gap. Saudi Arabia has been asked for a $5 billion deposit in Pakistan’s foreign reserves as well as for the provision of a deferred payment facility on oil. Pakistan had already availed the latter facility over the last three years. Saudi Arabia could provide one part of the necessary cushion to Pakistan, which could allow it to avoid going to the IMF and meet its stringent terms. The other part of the deficit is set to be met by approaching China. China has already provided around $2 billion in cash support, which is likely to increase to around $5 billion. With Pakistan needing around $12 billion next year, this will mean that the government will have to take strong measures to reduce the import bill. The conditions might not be imposed by the IMF but will have to be imposed internally to prevent the country from facing a balance of payments crisis.
We have spoken before about the perils of IMF funding, which remains a stigma that the PTI government wishes to avoid as it charts its economic agenda. China and Saudi Arabia sound like better options, but mostly because the terms of the loans are not made public. The interest rates, conditions, and repayment schedule are not shared openly. The US seems to believe that Pakistan might approach the IMF to repay Chinese debt. This is a half-farce given that most of Pakistan’s external debt is owed to the IMF and World Bank. However, one must wonder what part of those concerns should be true for our own economic health. Moreover, there seems little different in the way the PML-N and the PTI have approached this issue. The PML-N also used China and Saudi Arabia to cover the remaining deficit during the IMF bailout package. The PML-N also imposed ad-hoc customs duties to reduce imports. It should also be clear that the one percent duty increase in customs duty under consideration by the PTI leadership will not work to reduce imports sufficiently. It is hard to forget former finance minister Ishaq Dar’s confidence that Pakistan had broken and beaten the begging bowl. It is not unlikely that we could see a PTI finance minister make the same claims two years from now. But the reality is that if the current short-term approach to Pakistan’s finance strategy continues, the country will have to keep returning to the begging bowl ever so often.