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July 10, 2018

The bowl remains intact


July 10, 2018

Despite former finance minister Ishaq Dar’s bold promises that Pakistan had beaten the begging bowl, the country’s next elected government faces a challenge over how to avoid seeking another IMF bailout. The fiscal situation in the country is reaching crisis levels – and it would be no exaggeration to argue that Pakistan it is in a worse situation than it was five years ago. The Pakistan Muslim League-Nawaz made short measure of the Pakistan People’s Party’s (PPP) term in office and promised not to repeat the same errors. Although the IMF bailout did act as a buffer, it was unable to stem the rapid fall of Pakistan’s foreign reserves. Pakistan’s foreign reserves plunged from $16 billion in April to $9.6 billion at the end of June. Pakistan’s trade deficit, responsible for the situation, has continued to rise despite the government claiming that it was prioritizing export growth. If the same pace continues, Pakistan will be out of foreign reserves within the next six months. This is a good estimate of the narrow timeline that the next elected government will have to be able to get the country out of this situation.

The trouble is that there are no magic bullets available when it comes to the economy. What can be said is that the current approach is failing. This has included devaluing the currency, increasing domestic borrowing and issuing sovereign bonds while increasing machinery imports under the guise of the China-Pakistan Economic Corridor. The currency devaluation has not had a positive impact. It has been said before, but it is worth repeating, that currency devaluation does not create any advantage for import-dependent economies like Pakistan. If anything, inflation will mirror how much the Pakistani rupee has been devalued by the middle of next year. The increase in domestic borrowing and sovereign bond issues means that public debt sits at 70 percent of the GDP. When the time comes for the government to pay off its debts, it could default or start issuing more currency notes. Both situations would destabilise the economy and spur high inflation. The caretaker finance minister has indeed admitted that Pakistan has to find a way of plugging the $25 billion trade deficit. Choosing the IMF would be a bad call – but then the next government will have to come up with a coherent short-term and long-term plan to avoid a crisis.

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