Interim government starts groundwork for IMF bailout plan

KARACHI: Trapped in historic high twin deficits — current account and fiscal — Pakistan is expected to knock at the door of International Monetary Fund (IMF) seeking a financial bailout package.
The country’s caretaker Finance Minister says she is starting groundwork, leaving the option of a final decision to the forthcoming government.
“The interim government is taking steps within its limited mandate to push for stability. Groundwork is being done so that the next government can proceed with a fast pace to avail the facility from the IMF,” said Dr. Shamshad Akhtar, former governor of State Bank of Pakistan and caretaker finance minister while speaking to members of the Pakistan Stock Exchange.
“The IMF, the World Bank and the Asian Development Bank are ready to engage with Pakistan,” she added.
As the country heads toward the polls on July 25, the fiscal position of the country is deteriorating owing to “off-the-budget liabilities” of the government, pushing the country’s financial managers to seek a short-term stabilization program to support the wobbling economy.
“We have the mandate to approach IMF but the interim government has no intention to seek IMF financial assistance,” said Akhtar. “The interim government is undertaking the necessary diagnostics of the situation and analysis which hopefully will serve as useful input for the incoming government to take appropriate decisions and steps,” she clarified.
The Pakistan economy grew by 5.8 percent during the outgoing fiscal year, FY18, cushioned by the good performance of agriculture and industry. Besides, the country’s contribution by the services sector over the years has outperformed other sectors to more than 59 percent of GDP. The growth of the country was driven by rising aggregate demand as consumption and investment were quite strong, which led to the highest ever trade deficit of $37.67 billion as imports rose to $60.8 billion, Federal Bureau of Statistics data show.
Due to increasing imports and debt servicing, the foreign exchange reserves of Pakistan declined to $9.47 billion by July 6, 2018. “Pakistan can ill afford to deploy its foreign exchange reserves regularly for imports; imports are needed but need to be accompanied by high export revenues or foreign flows,” Akhtar noted.
Pakistan relies on exports and workers’ remittances to offset its current account imbalances but due to insufficient inflows, this remains the immediate challenge. “This calls for aggressive and pragmatic interventions to handle the situation,” Akhtar added.
As the country faces kind of financial turmoil, the financial experts call for immediate action to end economic uncertainty. “As far as the IMF is concerned, the government should take a very clear-cut position. If they do not make a long-term agreement they should go for a stand-by arrangement which could be later changed into a long-term agreement. At this time the action is a must to settle down the uncertainty,” Dr. Salman Shah, former finance minister of Pakistan, told Arab News.
But some economists are opposed to the government’s approach of looking toward IMF. Instead, they suggest alternatives. 
“I am proposing a selective demand approach, which means restricting the import of luxury items, rather than ‘across-the-board’ demand restraint, passing on the cost of adjustment to the segments of the population, breaking the trade-off between economic adjustment and economic growth by trying to bring about an ‘expansionary adjustment’ rather than a recessionary adjustment, and not increasing foreign exchange reserves by increasing exports only, but we have to focus on expanding exports, reducing imports, increasing remittances, and foreign investment,” Dr. Shahida Wizarat, senior economist, told Arab News.
The country faces depleting foreign exchange reserves in the backdrop of increasing demand for the US dollar to meet import obligations. “Supply of the dollar has halted or reduced due to uncertainty as the people are confused about the final exchange rate of the dollar against the Pak rupee. If the government is able to manage the supply of dollars for a short period it would stabilize the situation, at least for the short term”, Shah noted.
Pakistan, under stiff pressure, has devalued its currency thrice since December 2017 up to PKR119.84 ($0.99) till June but the currency kept a downward journey and depreciated by another PKR 6.45 against the greenback on Monday to PKR128 in interbank market, a sign of forth devaluation.