Pakistan and the IMF: a tricky economic balancing act
As a new government takes the helm in Pakistan, the first order of business will be to deal with the challenges facing the economy. Compared with the situation in 2013, at the time of the previous political transition, Pakistan’s economy is now much larger. There are ongoing investments under the China-Pakistan Economic Corridor (CPEC), as well as private-sector initiatives in construction, energy and export-oriented industries.
A key concern, however, is that newfound economic growth, and even the recent rise in exports, is dependent on imported raw materials, machinery and related production inputs. While exports have increased during the fiscal year 2018 to $23.2 billion (an increase of 13.7 percent), the import bill is approaching $61 billion, resulting in a record-high trade deficit of $37.7 billion – 16 percent higher than the previous fiscal year. This has put pressure on the foreign-exchange reserves held by the Central Bank, which stood at a little over $9 billion by the end of July.
The depletion of foreign-exchange reserves has resulted in the downward slide of the Pakistani rupee against major currencies. During 2018 alone, it has declined by 15 percent against the US dollar. During the first two drops in the value of the currency exporters seemed happy as it increased their competitiveness overseas. However, when it slid beyond PKR 125 to a dollar, even exporters grew concerned because it greatly increased the cost of imported components used in products exported by the Pakistani manufacturing sector.
The falling value of the currency also added more than PKR 1 trillion to the burden of public debt. Debt as a proportion of Pakistan’s national income already stands at 74 percent, the highest level in the past decade and a half.
Against this backdrop, there are predictions that the new government, despite having a commitment from China to provide $2 billion of breathing space, might ask the International Monetary Fund (IMF) for help to ease the pressures on Pakistan’s balance of payments. In addition to filling the external financing gap, it is expected that this would boost investor confidence, which seems a bit jittery given Pakistan’s inability to put the brakes on current-account and fiscal deficits.
Of course, a deal with the IMF would also provide assurance to existing development partners with investments in ongoing and pipeline projects, most notably the World Bank Group, Asian Development Bank, and also bilateral partners. Their assistance will be increasingly important given the low levels of domestic resource mobilization and the need for the incoming government to clearly demonstrate to voters an expansion of the social safety net, the social protection program, and increased spending on social and infrastructure development.
While Pakistan is no stranger to IMF agreements, a key question is whether or not the new government’s economic managers can undertake smarter negotiations with the fund than those of previous administrations.
Dr. Vaqar Ahmed
While Pakistan is no stranger to IMF agreements, a key question is whether or not the new government’s economic managers can undertake smarter negotiations with the fund than those of previous administrations. This is essential to avoid the usual anti-development perception of IMF deals, which might call for a range of unpopular measures, including: higher taxes, the removal of tax exemptions, cuts in non-essential government expenditure, the selling off of loss-making public-sector enterprises, an increase in electricity and gas prices, and the cutting of losses in energy-sector generation and distribution systems. There are also expectations that the IMF might want more transparency in financial information related to previous and ongoing projects under CPEC.
Whether or not the new government decides to go to the IMF, it is important to be aware of the structural gaps that force the country to resort to the donor on a recurrent basis.
Five areas must be highlighted. First, previous administrations have not shown any will to reduce politically motivated government expenditures, resulting in large losses by public-sector enterprises and mounting debt in the energy sector.
Second, while the documentation of the economy has increased it has not been matched by the anticipated resultant increase in tax revenues, leaving the government continually taking on more debt to keep the public administration running.
Third, the reform of the electricity and gas sectors could not be completed, which is now a key reason for circular debt, higher prices of industrial inputs and, ultimately, an increased cost of doing business.
Fourth, the elitist political class in the past has refrained from reducing non-essential imports. Finally, regulatory reforms that could assist the development of startups and help small and medium enterprises to grow were not pursued.
• Dr. Vaqar Ahmed is joint executive director of the Sustainable Development Policy Institute, Pakistan. His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press. Twitter: @vaqarahmed