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Money Matters

Back in crisis

By Mehtab Haider.
Mon, 12, 17

Pakistan is once again at the crossroads where it will have to stop the foreign currency reserves from eroding by at least around $5 billion over the next seven months (up to June 2018) to fend off another bailout package from International Monetary Fund (IMF).

Insight


Pakistan is once again at the crossroads where it will have to stop the foreign currency reserves from eroding by at least around $5 billion over the next seven months (up to June 2018) to fend off another bailout package from International Monetary Fund (IMF).

Country’s dollar reserves fell by around $3.5 billion in the first five months (July-Nov) after current account deficit climbed to a whopping $5 billion. The foreign reserves depleted in the range of $900 million in the previous month’s last week alone.

Pakistan’s economic wizards got a breather after favorable Standard & Poor’s report maintaining the country’s rating and subsequently raising $2.5 billion from international market through Sukuk and Eurobond but it was almost one/third of which the country had already lost this year when the reserves nosedived by $900 million in last week of November.

Currently, the foreign currency reserves held by State Bank of Pakistan (SBP) stand in the range of $15 billion after being jacked up by $2.5 billion received through bonds in the first week of December 2017, even after ignoring forward swaps, which could meet the requirement of three months’ imports bill.

Now the economic managers will have to put their house in order to protect the foreign reserves because if they further deplete in the range of $5 billion it would fall to $10 billion, which is roughly meet to the requirement of two months’ import bill only, pushing the country into danger zone.

If reserves come down to this level in the next five to seven months period then Pakistan would be left with no other choice than to knock at the IMF door with a begging bowl.

Independent economists believe the country’s total foreign financing requirement would be standing at $26 billion as current account deficit could peak to $17 to $18 billion in the current fiscal year against official projections of $10 billion, while the debt servicing requirement stood at $8 billion for the current fiscal year.

Although, the current account deficit remained at $12.4 billion last fiscal year and it had already crossed $5 billion in the first five months but the economic managers still preferred to stick to the figure of $10 billion for the ongoing fiscal year which seemed unrealistic at this stage.

Now an IMF mission led by Herald Finger is currently in Islamabad for examining Pakistan’s economic health.

At IMF, they don’t know how to portray Pakistan’s economy as a negative report from the staff of the fund will accelerate the depletion of foreign currency reserves, while a positive report will promote ‘inaction’ among policy makers, paving the way for meeting the same fate after a pause of few months.

The IMF is simply in catch-22 situation at the moment and the only way out for them seems mixed signaling by drafting a report in a careful manner where everyone can find meat of its own choice.

There is a general consensus among all economic schools of thought that Pakistan will have to undertake structural reforms to fix internal and external challenges of the economy with or without IMF sponsored programme.

The only constant requirement is the undertaking of painful reform process to fix emerging challenges, which have the potential to blow out in the first half of 2018 when general elections will be around the corner.

All multilateral donors including the World Bank and Asian Development Bank are looking towards the outcome of ongoing IMF talks on the basis of which they will take decisions to continue halting programme loans or resume disbursements of dollar inflows for budgetary support in a major way.

The IMF’s satisfactory report on the stabilisation of economy, the country’s ability to finance its external gap and repayment capacity will be considered as letter of comfort (LoC) which will help Islamabad to get more dollar inflows in order to bridge the gap on external front.

There is a need to highlight another relevant as well as important development that took place last week on the eve of Sustainable Development Policy Institute (SDPI) conference in which mainstream political parties including PML-N, PPP, PTI, and ANP publicly evolved broader consensus for signing Charter of Economy in order to de-link economy from politics. However, devil is in the details as these political parties will have to strike consensus on thorny issues such as privatisation, taxation measures, fiscal coordination among center and provinces.

They will have to rationalize National Finance Commission (NFC) awards, boost manufacturing sector including Large Scale Manufacturing (LSM) and Small and Medium Enterprises (SMEs) for providing right kind of incentives to promote industrialization.

It will help pave the way for increasing exports, placing effective mechanism to discourage imports through administrative and non tariff barriers (NTBs).

For instance on privatization, there is a clear cut division among political parties on the strategy to overcome cash bleedings of public sector enterprises that range between $5 to $7 billion on per annum basis.

In principle, Miftah Ismail, the sitting advisor to PM on economic affairs, and Senator Nauman Wazir of PTI seemed unanimous for undertaking privatisation of Public Sector Enterprises (PSEs) with the sole condition of ensuring transparency in the proceeds.

However, Nafisa Shah, a PPP lawmaker, sternly opposed the privatisation and suggested placing better management to overhaul these state-owned enterprises. These politicians also cited examples of bad privatisation transactions done in the past as an excuse to halt this whole process for indefinite period but Pakistan cannot afford continuous unbearable losses in the years to come.

Syed Naveed Qamar, former federal minister and PPP leader, made an interesting observation that any government coming into power could undertake privatisation in first six months after assuming power so there was no need to waste time for making efforts in remaining four and half year period. Qamar also told the SDPI conference that he had suggested the same thing to the PML-N leaders but they did not listen to him.

At this critical juncture, no simple solutions or quick fixes are available so the country would have to evolve consensus on economic agenda for pursuing it for short to medium and long term periods for reversing the doomsday scenario or be ready for the suffocating demands of the IMF for another three to five years.

And this time, Pakistan will have to pay a higher price for availing a bailout. It is quite likely that Pakistan will be forced to choke its progress on the development of China-Pakistan Economic Corridor (CPEC) by the ‘lender of the last resort’ without naming the project.

The writer is a staff member