Loans and bonds

When Finance Minister Miftah Ismail promised during his budget speech that the exchange rate devaluation would result in improving Pakistan’s foreign currency reserves, eyebrows should have been raised. We have already said that the move would not have an impact on the short-term fiscal stability of the country. Instead, the country would have to rely on other sources to cover the depletion of its foreign exchange reserves if it wants to avoid a return to the IMF. Now there are reports that Pakistan will attempt to secure around $5 billion dollars through a combination of safe deposits from China and sovereign Eurobonds. While these measures do not come with the conditionalities attached to IMF loans, any decision to go for these to secure foreign currency will confirm that the country is in a very tough fiscal situation. The balance of payments situation is a tricky one, and can be seen in the budget documents. Pakistan plans to obtain over $10 billion in external loans in the next fiscal year. This is in additional to the three-fold increase in borrowings from domestic commercial banks that has been budgeted. The Eurobonds and loan from China, however, are not budgeted for – neither in this year nor in next year’s budgets.

While we must await official government notification before commenting on why such measures were not included in the budget already, Pakistan is predicted to need $18 billion to finance next year’s current account deficit and debt obligations. The existing budgetary allocation accounts for around $10 billion in borrowing – minus the Chinese finance and sovereign bonds. Once these are accounted for together, Pakistan will still need to find another $4 billion somehow to avoid defaulting on its external obligations. This is neither easy fiscal management nor prudent fiscal management. Pakistan’s external debt has been growing to pay back existing debt, and our high growth rate has been acting as a buffer for external lenders – who will start getting agitated as soon as there are signs of a downturn. Some of the numbers would suggest that Pakistan is on the verge of a balance of payments crisis, at least in the medium term, if not in the short term. There is a need for more serious fiscal management rather than short-term fixes to keep up appearances that all is well. Short-term fixes will eventually cause a bigger crisis when they catch up. This is a serious situation which needs a well-reasoned response but this seems unlikely with little time left for the current government.