Avoiding IMF programme not a solution

LAHORE: People at the helm of affairs agree that assistance from the International Monetary Fund is needed, but cannot finalise the time when to seek it, as some of them think the government should go to IMF after some improvement in the economic conditions, while others advise to approach the Fund immediately.

Pakistan has avoided IMF programme because it tried to improve the balance of payments position through loans from friendly countries; opinion within the cabinet is divided whether to seek assistance immediately or wait for another four months.

Six months ago, Pakistan was desperate for IMF programme, but the economic conditions were so bad that the government could not politically accept the harsh conditions that were indicated by the Breton Wood institution.

Pakistan avoided the balance of payments crisis through loans from friendly countries. The country received $3 billion loan from Saudi Arabia, $1 billion from the UAE ($2 billion in the pipeline) and over $1 billion from China. After the remaining UAE commitment is materialised, the total loan amount would be over $7 billion. The $3 billion oil supplies on deferred payment would provide a further cushion to the foreign exchange reserves.

The question is what next? After six months we will again be in the same position as we were in August 2018. Our exports are still almost half than our imports. Against exports of $25 billion in the last fiscal year, we expect to reach $27 billion this fiscal year.

Our imports would still be in the range of $50 billion even after some decline in the import bill. Our remittances are expected to be in the range of $21 billion.

The trade balance would still be $2 billion. After taking into account debt servicing liabilities, repatriation of profits by foreign investors and other outflows the foreign exchange needs would still be over $10 billion in the next fiscal year.

This means that we would not be in a comfortable position even in the next fiscal year. We would need IMF support or further inflows from the friendly countries.

Arranging further loans from our friends would not be possible. The government is perhaps banking on the dollar bond it launched for overseas Pakistanis. These bonds carry heavy interest rate. The response of expats was lukewarm on dam fund, let us see how they response on the bond issue.

The government has set no limit for these bonds, meaning it is expected to receive $2 to 4 billion. This again would not cover our next year’s needs.

Pakistan is in a better position now to negotiate a programme with the IMF because of the financing by our friends.

The IMF conditions in the current situation would not be very harsh. In fact, Finance Minister Asad Umar has said that the IMF has shown flexibility on some issues.

Realistically, Pakistan has fulfilled many IMF conditions even before finalising a programme.

The rupee has been heavily devalued, the interest rates have crossed double figures, and exports are increasing slowly and imports declining. The gas and power rates have been jacked up to the dismay of domestic consumers.

The only thing missing is the lack of government efforts to boost tax revenues. The government is already short of truncated tax revenue target by Rs197 billion in the first seven months of the current fiscal year. It has to find a way to increase revenues and the IMF would be justified in demanding increase in revenues.

The IMF would advise increasing the rate of sales tax and Customs duties to increase revenues. The government would have to assure the multilateral creditor that tax revenues would increase through enlargement of tax base. If they have a programme, in this regard, they should discuss it with the IMF.

The donor would accept governments’ assurance, but if no progress was shown in the next three months, the programme would be in jeopardy.

However if the government dragged the negotiations for too long, our balance of payments situation would start deteriorating. We must keep in mind that this government is trying to save dollars with the help of our friends, but we have to pay them back with interest.

The $3 billion deferred oil payment facility would be exhausted in three to four months after which we would have to pay back the oil we consumed on credit. In that case, the IMF conditions would again become very harsh.