FeaturedInternationalVolume 14 Issue # 09

Between China and the IMF

The Pakistani rupee has lost about a third of its value since the start of 2018. The currency plunged almost 5pc to a record low of Rs143 against the dollar in a sixth devaluation recently, as the country struggles with an acute balance of payment crisis. Many economists believe the dollar rate is being raised to show the International Monetary Fund (IMF) the government is committed to taking a bailout package.


Talks with the IMF have remained inconclusive, with the announcement of another round of talks in January 2019, because Pakistan has refused to cave in and accept tough conditions, which included an increase in energy tariffs from 20 to 22pc, imposition of more taxes, sharing of details related to Chinese loans, further devaluation of the rupee, which has already depreciated more than 27pc since the start of the year and 15pc in the last five months alone. Pakistan does not want to share details of the Chinese loan with the IMF over national security reasons while other conditions will have serious repercussions for the poor of the country.

The Pakistan Tehreek-i-Insaf (PTI) government of Prime Minister Imran Khan has averted the balance of payment crisis for the time-being after the availability of $6 billion from Saudi Arabia and the assurance of similar amounts from China and the United Arab Emirates (UAE). However, Pakistan’s current account deficit has swelled to an all-time high of $18 billion in the outgoing fiscal year, while the budget deficit edged up to around 6.6pc of GDP. Pakistan requires approximately $12 billion for balance of payment support by the end of June next year. The government is desperately seeking financial support to fill the alarming gap. Though, it has been successful to some extent by securing a $6 billion deal from Saudi Arabia and almost the same amount from China and the UAE together, yet it is still short of $6-$7 billion for which it decided to contact the IMF. Former Finance Minister Dr. Hafiz A. Pasha says Pakistan would have to take tough decisions, keeping in view the huge gap on the external front. “If there is no IMF arrangement, then tougher decisions will have to be taken by the government in days and months ahead,” he believes.


Businesspeople are concerned that neither Prime Minister Imran Khan nor Finance Minister Asad Umar laid out a comprehensive plan to address the country’s economic woes, even weeks after negotiations with the IMF collapsed without a much-needed bailout package. Most economists and even a member of the government’s Economic Advisory Council, Dr. Ashfaque Hassan, advised the government that Pakistan must learn to live and survive without the IMF. However, major financial and economic centres are predicting that the dollar rate is being raised to show the IMF that the government is committed to taking the bailout package.


On the other hand, Prime Minister Imran Khan shocked journalists when he told them in an interview that he was not aware of the sudden devaluation of the rupee, indicating that there was complete lack of communication and coordination on fiscal, monetary and exchange rate policies at the top level. Some say Prime Minister Imran Khan was not informed about the steep decline of the rupee against the dollar that touched the lowest ebb of Rs144 against the dollar in the early hours on November 30, but later in the day the rupee re-adjusted and settled at Rs139. The correction was made after his intervention because he was aware of its negative impact on the poor in terms of hiked prices of basic necessities. Critics say the State Bank of Pakistan could not allow the massive devaluation without the nod of the Finance Ministry and it is a deliberate step to send the signal to the IMF that it is ready to accept its tough conditions.


Analysts say the government is still not sure about an IMF loan or a Chinese package. Instead of hard cash, China plans to provide multiple forms of bailout packages to Pakistan in the shape of substantial investment in fresh projects, broadening the area of inclusive cooperation and tapping new avenues of collaboration under the China-Pakistan Economic Corridor (CPEC). According to Chinese Consul General Long Dingbin, China would never leave Pakistan in the lurch and would channelize maximum resources to strengthen its languishing economy. In an interview to a Pakistani news channel, he said the scope of investment had been widened by inking 15 new agreements during Prime Minister Imran Khan’s recent visit to China. “The new agreements will help boost Pakistan’s economy and overcome its financial problems,” he explained.


As Pakistan waits for Chinese or IMF assistance, its external debt has swelled by Rs3.325 trillion from May 2018, till November 30, 2018, out of which almost Rs1.4 trillion debt was jacked by the PTI just on account of the rupee devaluation. The latest plunge of the rupee has added to inflation up to 8.5pc from 7pc and prices of almost all daily-used items have increased. The cost of Liquefied Natural Gas (LNG), petrol and coal, which are used for electricity generation, is also expected to surge. According to the Finance Department, Pakistan’s reserves stand at $8 billion, out of which the government needs to pay off $6.5 billion to international creditors, so Pakistan has negative $4 billion in reserves, which is why the rupee massively declined in a day. More importantly, the country faces a deficit of $30 billion in the next few years. In the few months of the PTI government, the dollar has appreciated almost by Rs16, owing to which Pakistan’s external debt has increased by Rs1.4 trillion.


Experts say the dollar value will ultimately settle between Rs145 and Rs150, if Pakistan reaches a deal with the IMF. Pakistan will also have to accept other demands of the IMF, though partially, if China fails to rescue it with hard cash immediately.