Saturday April 13, 2024

Goodbye to the IMF?

By Hussain H Zaidi
August 06, 2016

Has Pakistan’s economy become strong enough to stand on its own feet without the crutches of foreign assistance? The federal government believes so in the wake of the International Monetary Fund’s clearance of the last $102 million tranche of a three-year $6.4 billion Extended Fund Facility (EFF). Is the optimism, which is shared by the IMF as well, warranted?

Breaking the begging bowl once and for all was one of the promises of the PML-N in the run-up to the 2013 elections. However, within three months of its formation, the PML-N government was forced to knock at the door of the IMF for assistance. The preceding government had also gone to the multilateral donor in 2008. The current IMF programme started in September 2013. The EFF is designed for economies facing low growth and an inherently weak balance of payment (BoP) position as well as those suffering structural impediments.

The pre-poll pledges of the PML-N aside, Pakistan having gone back to the Fund was not surprising in the slightest. Given the state of the economy and the need to repay the government’s obligations to foreign creditors, it was never a question of whether Pakistan would go back to the IMF but when.

A country’s request for IMF credit signifies two things in the main: that the economy is in a critical condition and needs immediate injection of capital; and that – given the political and economic costs of the Fund’s assistance – cash inflows from other potential sources are not coming through.

This is not to suggest that assistance from other multilateral or bilateral sources has no strings attached to it. However, because IMF conditionality is perceived to be tougher and politically unpleasant, its assistance is usually sought as the last resort.

A difficult balance of payment (BoP) position forced Pakistan to go for IMF assistance in 2013. At the end of June 2013, the net foreign exchange reserves available with the central bank had come down to $5.5 billion from $10.15 billion nearly a year earlier. The current account deficit and trade deficit made up 2.4 percent and 6.7 percent of GDP respectively. An economy running current account deficit and at the same time unable to attract considerable foreign direct investment finds it difficult to work off foreign debt and, ironically enough, has to go for external assistance thus accumulating more debt.

Is the economy looking up as the IMF programme approaches its end?

At the end of financial year 2015-16 (FY16), current account deficit was $2.52 billion (0.9 percent of GDP). The two key components of current account balance are trade balance and remittances sent by nationals working abroad. Trade deficit at the end of FY16 was $18.46 billion (6.43 percent of GDP). This means that, as percentage of GDP, neither current account nor trade balance has improved. Both exports and imports registered negative growth (8.6 percent in case of exports and 2 percent in case of imports) to reach $22 billion and $40.46 billion respectively.

Earlier in FY14, exports had surpassed $25 billion for the first time in the country’s history but subsequently fell in FY15 and further in FY16. Not only that, the export base continues to be narrow and exports are dominated by primary products and semi-manufactures. For sustained export growth, such structural constraints need to be addressed.

Remittances have registered substantially over the years to reach $19.91 billion in FY16. On the other hand, FDI inflows have dried up. Between FY09 and FY14, the country received FDI of $1.9 billion a year on average. In FY15, $923 million was received as FDI, which rose to $1.28 billion in FY16. Pakistan may present the most liberal FDI regime in the region but several factors, at the top of which is the precarious security situation, have held back FDI.

On the whole, the BoP situation has eased and foreign exchange reserves have increased. As on June 30, 2016, net foreign exchange reserves with the central bank were $18.12 billion. But the recovery is precariously placed as it has a lot to do with lower oil prices, foreign assistance and remittances from Pakistani expatriates. Not surprisingly, external debt and liabilities, which stood at $58 billion at the close of FY13, have gone up to $69 billion (as on March 31, 2016).

Today’s debt is a drag on consumption tomorrow. The higher the debt, the narrower is the fiscal space available to the government. Already, debt servicing is the single largest component of public spending, with external debt servicing accounting for 24 percent of GDP.

From the external sector we may move to the domestic sector. During FY16, economic output expanded by 4.7 percent compared with average growth of 3 percent between FY09 and FY13. Fiscal deficit has been slashed to 4.3 percent of GDP compared with 8.3 percent in FY13. Tax-to-GDP ratio has gone up from 8.7 percent in FY13 to 10.1 percent in FY16.

Economic fundamentals, however, remain weak. Take the key indicators of savings and investment, which most economists believe are the real drivers of growth. Saving-to-GDP and real sector investment-to-GDP ratios for FY16 were 14.6 percent and 13.61 percent respectively compared with 13.9 percent and 13.36 percent in FY13 – thus showing only a marginal improvement.

As per World Bank data, Pakistan’s investment-to-GDP level is one of the lowest among the developing countries and the lowest in South Asia: India (35), Bhutan (56), Sri Lanka (30), Bangladesh (27), Nepal (35).

Likewise, despite multiple levies, the share of taxes in the national income remains among the lowest in the world thus forcing the government to borrow from the banks.

It follows from the foregoing that on the whole the economy is beginning to look up. However, an economic turnaround is still a long way away and it is doubtful whether the economy will not have to go back to multilateral donors like the IMF.