As Pakistan celebrates its Independence Day today, it is also grappling with a big economic crisis. The State Bank of Pakistan has only about $10 billion of foreign exchange reserves, which may not be enough to fund imports after two months. The country runs a serious risk of defaulting on its payments. The situation poses a challenge to Pakistan’s prime minister-elect Imran Khan who will be sworn in on August 18.
Imports exceed exports ::
The balance of payments crisis originates in the current account deficit, which is the value of imports exceeding the value of exports. Pakistan’s current account deficit has grown four times in just two years. It touched $18 billion in FY18, up 42.5 per cent over the previous fiscal year. Two years ago, it was at $4.876 billion, rising to $12.621 billion the following year.
Why it happened ?
Between July 2017 and March, about 70 per cent of the country’s import bill was for energy, machinery and metals, AFP reported. The import bill ballooned mainly due to higher oil prices and imports from China which is building several infrastructure projects in Pakistan under the China-Pakistan Economic Corridor programme. There was a marginal increase in exports which are mainly textiles. Pakistan has devalued its rupee four times since December with an aim to make its exports cheaper. The previous Nawaz Sharif government failed to take advantage of low oil prices to build foreign reserves. Corrupt regimes, faulty economic policies and low tax revenues have brought Pakistani economy to the brink.
The IMF option ::
The only option visible to Pakistan is to go to the International Monetary Fund (IMF) for loan. Pakistan has borrowed from IMF more than a dozen times since 1980. Though the total financing gap for the current fiscal is at around $12 billion, Pakistan could not get more than $9 billion from IMF according to its maximum quota. Pakistan hopes this could start a virtuous cycle in the economy and lead to closing of the remaining gap. However, for the IMF bailout, it needs support of several countries, including the US, which has warned the IMF against helping Pakistan as the country could use the IMF money to repay its China debt. “There’s no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself,” U.S. Secretary of State Mike Pompeo told IMF.
The trouble with IMF bailout ::
Even if IMF extends help to Pakistan, it will come with strict conditions which might include further devaluation of the currency, disinvestment in loss-making PSUs, hiking electricity rates and cutting agricultural subsidies. These condition will jeopardise Imran Khan’s new government as well as hit economic growth. Khan has announced that he would run an “Islamic welfare state” hinting at higher public spending. So far, IMF has not made any promise to bail out Pakistan, nor has Pakistan asked for a bailout.
Other options ::
While Pakistan can also seek Saudi Arabia’s help, the most the Gulf country can do is to defer oil payments. China, Pakistan’s so-called all-weather friend, is another option. China’s funding will not come with IMF-like conditions. But rising Chinese debt is already a worry for Pakistan. Borrowing from China would mean a higher debt burden. According to a Reuters report, China lent Pakistan $1 billion in June this year to boost its foreign reserves. With this, China’s lending to Pakistan in fiscal year ending in June breached $5 billion.
What Pakistan can do ?
The new Imran Khan government faces a tough task of turning around the economy. Khan is going to appoint Abdul Razzaq Dawood as his economic adviser. Dawood, an industrialist, was the commerce minister in Pervez Musharraf cabinet from 1999 to 2002. Khan needs to bring in economic reforms, restrict government spending and imports, try to increase tax revenues and take advantage of devalued currency to increase exports.
Latest posts by Indian Defence News (see all)
- Indian Coast GuardRecruitment 2019- Navik 10+2 - January 22, 2019
- NDA Exam 2019 (I), NDA 2019 (I) Entrance Exam - January 22, 2019
- Indian Navy Executive and Technical Branch Jan 2020 Course - January 22, 2019