The capital crunch

August 18,2018

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As if ordained by destiny, every government in Pakistan inherits a cadaverous economy undergirded by high current account, trade and fiscal deficits, low foreign exchange reserves, and a falling exchange rate.

While bemoaning that its predecessor messed things up, a new ruling party sets its teeth into shaping up the economy. In a year or so, some of the key economic indicators began to look up. But the momentum is seldom sustained. By the time the new election cycle commences, the economy has again fallen into a tailspin. The cycle is repeated every five years.

The new PTI government also faces a tall order. As a percentage of GDP, the previous financial year ended with fiscal deficit of 6.8 percent, current account deficit of 5.7 percent, and trade deficit of 12 percent. The substantial external sector imbalances drove down both the value of the rupee and foreign exchange reserves, and racked up foreign debt. The immediate challenge for the new government is to find ways to overcome the liquidity crunch. Evidently, this will require great gobs of capital inflows. But the million-dollar question is: where will this much-needed capital come from?

The PTI has always set down all the country’s problems to massive corruption and held that white-collar crooks have stashed away foreign exchange to the tune of $200 billion in Switzerland and other banking havens. If this amount is brought back to Pakistan – when Imran Khan was in the opposition, he- said from time to time that he would do so if he came to power – the capital crunch can be overcome once and for all. From being a net debtor, the country will become a net creditor.

Imran Khan, as we all know, never flip-flops on his word. Without casting aspersions on our new political master’s integrity, we can safely say that repatriating the ill-gotten money will be easier said than done. The actual amount lying in bank vaults overseas is a matter of conjecture. No authoritative source has ever revealed the precise size of these bank deposits. Given the size of Pakistan’s economy, the $200 billion figure seems to have been exaggerated. A few years back, the head of NAB had through an off-the-cuff remark put the corruption figure in the country at Rs7 billion a day. The figure, which amounted to Rs2.55 trillion, or about $27 billion a year, given the then exchange rate, was fairly off the mark. But it was readily picked up by opposition parties.

Let’s suppose that whistleblowers in foreign banks tipped off the exact figure to some equally conscientious Pakistanis. But why would Switzerland, or for that matter any other country, agree to give back the money that they presumably owe us? The best practices that all banking havens follow put a high premium on safeguarding the trust of customers. Otherwise, they may turn into a banking hell.

We may make another supposition to the effect that: impressed with the credentials of the new government in Islamabad, these countries are prepared to take that risk and agree to transfer the looted wealth back. Even in that event, it will take months to complete the necessary paperwork and the transactions. We must remember that Pakistan’s capital needs are immediate.

The PTI has another weapon in its armoury: generous contributions from the well-off diaspora. Imran Khan has claimed on countless occasions that non-resident Pakistanis (NRPs), particularly those settled in North America and Western Europe, are keen to help their country of origin. But the presence of corrupt people at the helm held the NRPs back from investing in Pakistan. This is quite logical as no one wants their hard-earned savings to be stolen. The changing of the guard in Islamabad will be instrumental in shake off this obstacle.

But there is still one problem: when an economy is facing severe balance of payment (BoP) problems, private capital tends to flow out rather than in. Such is the stuff capital is made of, and it can hardly change just because someone like Imran Khan holds the highest political office of the land. Yes, overseas Pakistanis may invest in government bonds provided a competitive interest rate is offered. But that would be out of economic, rather than patriotic, considerations.

As substantial private investment is difficult to come by, the government would have to seek loans, either from another country or from a multilateral or regional lender. To put it precisely, Pakistan will have to borrow either from the IMF or from another source. Both before and after the elections, Imran Khan as well as his economic team didn’t rule out the possibility of Pakistan going back to the IMF.

Since the Fund’s conditionality for bailing out an economy is believed to be more stringent than that of other organisations, its assistance is usually sought as the last resort. Be that as it may, bilateral assistance also comes with many strings attached to it. The only difference is that while most conditions are laid on the table in the IMF’s, most of the strings – which are political – remain invisible in terms of bilateral aid.

According to a report in the Independence Day edition of this paper, China and Saudi Arabia, two of Pakistan’s closest allies, have vowed to help the country address its BoP problems if it takes “corrective” measures to address domestic and external imbalances. China recently gave a $2 billion worth of loan to Pakistan, which eased the pressures on the external account and pushed the rupee up by a few percentage points. Contrary to what the Naya Pakistanis would have the nation believe, the PTI’s electoral triumph had nothing to do with that welcome development.

The conditional assurance of assistance from our friends is a double-edged sword. At one end of the scale, it creates a window of opportunity for the cash-strapped government. The condition to set our own house in order to ensure prudent economic management is only logical, as every creditor wants its money back. At the other end of the scale, the economic conditions will be accompanied by political conditions – particularly from the Saudis – that would not be made public. Compliance with political conditions will be a real test for the government.

There is one little piece of the puzzle with regard to Chinese assistance. China is the principal source of Pakistan’s imports. In 2017, China accounted for $15.38 billion out of Pakistan’s total imports of $57.44 billion. Cutting back on imports, which is likely to form part of the corrective measures in question, will hit China the hardest. Why would a country, which has already been slapped with heavy punitive tariffs in its single largest export market (the US), loan its export savings to another country subject to the conditions that are likely to bring its exports down? No, the skipper’s superlative ability to leave his friends and foes spellbound is not the answer.

Let’s suppose that with or without IMF assistance, the new government steers the country out of the BoP crisis. While it would be quite an achievement, it would by no means be an unprecedented one. The PPP did the same thing in 2008-2009 and the PML-N did it in 2013-2014. But once the feat has been accomplished and the economy is out of the woods, the test for the new governors will be to manage the economy in such a way that the country wouldn’t have to go back to the donors at the end of their term.

The writer is a freelancecontributor.



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