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October 25, 2018

Before the match is over


October 25, 2018

Skipper Imran was known for his resolve to fight till the last ball of the match. He could be banked on for providing a breakthrough to his team in the most crucial moments of the game.

Premier Imran repeated the performance of Skipper Imran and managed a rescue package from Saudi Arabia for Pakistan’s ailing economy. The news brought relief for both the people and the government of Pakistan, which were equally apprehensive about the possible side-effects of a contractionary economic policy that would accompany an IMF programme.

The market too, responded to this news very well as the stock market improved by 1400 points in the morning trading session and the rupee appreciated against major currencies of the world. The external financing requirement for this fiscal year amounts to $12 billion. The initial plan was to request the IMF for an extended fund facility programme of $8 billion and arrange the rest through friendly countries and/or through floating bonds and other financial instruments.

As per IMF rules, members facing a balance of payments problem can immediately withdraw up to 25 percent of their quota in gold or convertible currency. If this is insufficient, a member country may borrow up to 300 percent of its quota under normal circumstances. Pakistan’s quota in the IMF is $2.85 billion. In normal circumstances, it could easily borrow $8 billion from the IMF, but it already owes $6 billion from the previous programme; thus borrowing anything beyond $6.25 billion would require special lobbying with the IMF Board, especially with the US. Keeping in view the prevailing political differences between Pakistan and the US, Pakistan would certainly have to go few extra miles to secure $8 Billion from the IMF Board.

The Saudi package has brought Pakistan back in the game. With $3 billion balance of payments support from Saudi Arabia for one year (the Saudi government will put $3 billion in the State Bank of Pakistan for one year at a mark-up of three percent, a similar arrangement was made by Ishaq Dar in 2014) and $3 billion arrangement for oil on deferred payment, Pakistan’s external financing requirement has reduced by half. The Saudi package has improved Pakistan’s negotiation powers not only with the IMF but also with other ‘friendly’ countries.

One is expecting an ‘oil on deferred payment deal’ from the UAE whose ruler will visit Pakistan before PM Khan’s tour to China. This should shed off another $1-2 billion burden from Pakistan’s immediate external financing requirement.

Unlike the Gulf countries, China will not be able to provide a direct bailout. However, like the first phase of the CPEC ‘early harvest programme’ which was fully financed, China may announce a price tag for some of the projects enlisted in CPEC’s ‘Long Term Plan’. Depending on our homework, we may arrange another $4-5 billion from China for some tangible projects under CPEC.

This would significantly reduce our borrowing requirements from the IMF. Having said that, we would still need to go to the IMF (even if it is for a small lending arrangement for a shorter period of time) as Pakistan still needs to obtain the ‘letter of comfort’ from the IMF to improve its credit rating in global markets, to engage with other multilateral lenders, and to sell its bonds at an affordable mark-up in the international market.

Apart from restoring confidence of investors and other market players, the two major advantages of the Saudi package are that, first, the government will be able to avoid the US’s non-economic conditions for an IMF loan. And, second, the government will be able to manage the negative impacts of contractionary economic policies (that it should take to revamp economy), which in turn would help it preserve its political capital.

The big question on the Saudi rescue package is its possible non-economic cost. The PML-N government also made such a rescue arrangement with Saudia and was expected to send troops into Yemen. The real test for PM Khan would be to maintain good relations with the kingdom without compromising our policy of non-alignment in the Persian-Gulf.

Apart from safeguarding its foreign policy principles, the government would also have to safeguard the agenda of structural reforms in the economic and energy sectors. In the current scenario, where we may go for a short-term arrangement rather than an extended fund facility from IMF, the agenda of reforms should not get neglected.

IMF or no IMF, there are some measures that must be taken if the PTI government wants to deliver on its promise of revamping the country’s economy. These include: expanding income tax base through bringing taxable non-taxpayers into the tax-net, switching from indirect to direct taxes through FBR reforms, reforming loss-making PSEs through public-private partnership or privatisation, reducing circular debt through reducing transmission & distribution losses and investing in renewable energy sources, and enforcing strict fiscal discipline.

Sustainable development has three pillars: economy, environment and social sector development. So far, the government was firefighting to rescue Pakistan’s economy. The water component of the environment is getting (more or less) addressed through the judiciary, but social sector development still awaits any breakthrough. Part of the fiscal cushion that the PM has managed through his successful economic diplomacy may be diverted towards malnutrition, health, education, and reduction in income inequalities.

We know PM Imran Khan is used to contest till the last ball of the match; so are the excluded and deprived segments of our society, who show resilience till last breath. The only concern is that the latter may breathe their last before the former’s last ball. That is where another breakthrough is required.

The writer heads the SustainableDevelopment Policy Institute.

Twitter: @abidsuleri