InternationalVolume 13 Issue # 22

Going to the IMF again?

It seems the next government will be forced to go back to the IMF for a bailout package to rescue it from sinking deeper into the rising sea of debt. According to experts, it has become an established pattern for an outgoing government in Pakistan to seek fresh loans to pay off the existing ones. This happened in 2007-08 and 2012-13. This happened twice during the 1990s and is likely to happen this year again due to a worsening balance of payment position.

Figures tell the story. As per the Pakistan Bureau of Statistics data, during FY08, the final year of the PML-Q government, the current account deficit shot up to $14.1 billion (8.2% of gross domestic product – GDP) from $6.87 billion (4.8% of GDP) as trade deficit increased to $20.91 billion (12.3% of GDP) from $13.56 billion (8.9% of GDP).The rupee-dollar parity went up from 60 in 2003 increased to 68.3 by the close of FY08. Foreign exchange reserves fell to $11.28 billion at the end of FY08 from $15.18 billion in one year. This forced the new government to sign a $7.6-billion loan agreement with IMF, which later was enhanced to $11.3 billion. Again, in September 2013, another agreement with the IMF was signed for $6.12-billion assistance by the former PML-N government within three months of taking office.

What is the state of the economy now? In the first nine months of the current fiscal year (July-March FY18), $12.46-billion current account deficit was registered compared with $8.35 billion in the corresponding period of FY17, denoting a rise of 49.22%.The current account deficit included $22.30 billion in trade deficit compared with $18.47 billion deficit recorded in July-March FY17, which represented 20.68% growth.

In its report on Pakistan’s economy released in March 2018, the IMF projected $15.7 billion (4.8% of GDP) of current account deficit for the full financial year. It forecast 10% export growth and 10.2% import growth, which would take exports to $22.46 billion and imports to $58.22 billion, thus resulting in $35.76-billion trade deficit. But the July-March FY18 data suggests that the IMF underestimated the size of current account and trade deficits. Based on GDP growth of 5.8%, as forecast by the government for FY18, the projected GDP size for the outgoing fiscal year is $322.65 billion (FY17 GDP was $304.97 billion). Accordingly, at the current growth pace, the current account and trade deficits for FY18 will reach $19.59 billion (6.07% of GDP) and $39.32 billion (12.18% of GDP), respectively.

It is relevant to recall here that in FY17, the current account deficit was $13.13 billion or 4.1% of GDP while trade deficit was $32.58 billion or $10.68% of GDP. As per latest data released by the PBS, during FY18 (July-April), exports grew 13.67% to reach $19.2 billion while imports grew 14.04% to reach $49.41 billion, resulting in $30.21-billion trade deficit. At these rates of growth, the FY18 will end up with $37.22-billion trade deficit ($23.42 billion of exports and $60.47 billion of imports), which will account for 11.53% of GDP.

The worsening current account balance has affected both the exchange rate stability and foreign exchange reserves. After nearly four years of managed stability, the government allowed the rupee to depreciate by around five percentage points twice – in December 2017 and March 2018. One US dollar trades for over Rs125 in the open market. Liquid foreign currency reserves available with the central bank h gone down to $11.16 billion on May 4, 2018, from $16.14 billion on May 11, 2017, a loss of nearly $5 billion in less than a year.

There is generally a positive relationship between currency depreciation and export increase. Exports went up 10.52% in the first five months (July-November) of the current fiscal year before the first depreciation. The major reason was upward movement of international cotton prices, which has continued into 2018. So it is difficult to state how much the rupee depreciation has contributed to export increase.

Faced with insufficient FDI inflows, the government has had to rely mainly on debt-creating instruments, such as sale of bonds and commercial loans, on which interest rate is relatively high, to meet the current account deficit. Public external debt, which was $64.48 billion at the close of 2016, had gone up to $73.72 billion at the end of 2017. In the first seven months of FY18, the government borrowed $6.6 billion. In 2018, Pakistan will start repaying the $6.12-billion IMF loan, which would put further pressure on the BoP position. The FY19 budget has allocated Rs803.98 billion ($7.22 billion at an exchange rate of Rs115 per dollar) for the payment of principal and interest on foreign loans.

What is the way out?  An increase in exports and FDI is the key to reducing the external account deficit. But there are no indications of this happening any time soon. This leaves the only option of going to the IMF. But as they say, there is no free lunch. IMF facility comes with strings and tough conditionalities. Needless to say, the next government will be faced with the difficult task of deciding whether or not to contract IMF loans and on what terms.