The incoming Pakistan Tehrik-e-Insaaf (PTI) led government has not taken too long to acknowledge the inevitable: that the country will have to seek external loans to stabilise its economy that is stubbornly precarious and will be posing the single biggest challenge to Imran Khan’s team in Islamabad once it is in the saddle.
According to Asad Umar, widely tipped to be the next finance minister, that decision is only weeks away and is most likely to come sometime in September. Although he talks of considering all options, it is expected that ultimately the new government will go for an International Monetary Fund (IMF) bailout. Along with all this speculation of an impending request for an IMF package is the fact that the 13th loan facility, if sought, would be the largest as compared to previous twelve. It is reported that Pakistan could be requiring up to $12 billion in new loans. The last IMF loan was of $6.6 billion
While it is true that the country has gotten multiple IMF programs since 1980s and both preceding PPP (2008) and PML-N (2013) governments had started off by seeking IMF packages, it is important to see what is compelling us to go for another bailout and what would be its likely impact. For starters, IMF or any other loan facility will hope to address the “external imbalance” caused by a higher import bill as compared to earnings from exports and remittances. This gap is somewhere between $15 billion and $20 billion, depending on how you calculate it. Rising external debt servicing is in addition to that. According to IMF’s own estimates, given in the report on the First Post-Program Monitoring Discussions with Pakistan released in March 2018, external financing needs are “expected to rise from US$21.5 billion (7.1 percent of GDP) in FY 2016/17 to around US$45 billion by FY 2022/23 (9.9 percent of GDP)”.
The main reasons behind the surge in imports bills have been the increase in the import of machinery for CPEC projects and the rising petroleum prices in the international market. Moreover, this sharp projected increase in external payments over the next few years is also related to CPEC outflows in terms of loan repayments and profit repatriation, about which the people of this country know nothing due to the secrecy under which the previous government concluded all the CPEC deals. The PTI has promised to place all those agreements in the parliament once it assumes office. Better late than never, but of course unless the PTI government too is made to see the light by the relevant ‘iron stakeholders’.
US Secretary of State Mike Pompeo’s statement indicating his government’s intention to block an IMF package for Pakistan out of concerns that the money would be used to repay the CPEC loans may be misplaced in the diplomatic and political context, but definitely points to a reality. The doubling of the external payments over next five years is because of CPEC related payments. Therefore, all emotional reaction in Islamabad notwithstanding, the new government would alongside IMF also have to reach out to Beijing for restructuring of the loans that presently look unsustainable. It is a debate for some other time, but China must share the burden because Pakistan is not the lone beneficiary of CPEC, the project also serves Chinese interests.
The other factors that are keeping the economy under pressure are the loss making public sector enterprises (PSEs) that successive governments have failed to privatise due to their political expediencies and the returning circular debt of the power generation companies. The accumulated losses of all the PSEs exceed Rs1.2 trillion (4 percent of GDP), whereas the circular debt was back at Rs 573 billion on May 30, 2018. The two would together put substantial pressure on budgetary resources. When the PML-N government went to IMF in 2013, it promised privatisation of 68 loss making entities, but failed to deliver.
The situation would be further exacerbated by the foreign exchange reserves that are likely to continue on the declining trend in the medium term.
IMF is sometimes described as the lender of last resort. This is because it comes with conditions for what some call as “reforms”, but essentially meant to tighten the belt so that the borrower is able to pay back. The package will inevitably come with familiar conditions of raising tax rates, cutting expenditure on social programs like education and health and scaling down subsidies. This would then lead to reduction in growth rate (we should not forget 2008 experience when growth steeply went down after IMF package and couldn’t recover for the next five years), fewer jobs, rising unemployment and higher cost of living.
To put in common man’s words, if Imran Khan opts for IMF, he would have no available cash for setting up a Madina-like welfare state he so often mentions in his speeches.
As a parting note, it also needs to be studied why the previous 12 IMF loan packages and their associated conditions failed to correct our economy and why we keep going back to IMF again and again.
But, then there are very other options for the new government. “We are looking at options including raising money from the Pakistani diaspora, new sukuk [Islamic] bonds and requesting Saudi Arabia to defer our oil payments,” Asad Umar said in an interview with Financial Times. These ideas may sound good and would certainly keep us away from IMF, whom Former Senate Chairman Raza Rabbani calls “instrument of imperialist powers,” but most of these options come at a greater cost than IMF. Rabbani should not forget that it was his own party which stated in its manifesto for elections this year that it would go for IMF if elected to power.
The writer is a freelance journalist based in Islamabad