Pakistan has held talks with officials of the International Monetary Fund (IMF), China and Saudi Arabia but nothing concrete has emerged to ease its economic crisis, which poses political trade-offs between supporting economic growth, protecting domestic consumers and meeting external obligations.
Pakistan’s Finance Minister Asad Umar says the economy is on a ventilator, undergoing heart “bypass surgery” as the government is trying to improve its condition to provide relief to the public. However, it appears the government had not completed its homework to revive the economy before coming to power two months ago. It anticipated a bailout from China, Saudi Arabia and the IMF. Talks were held, hopes were raised but there was no word what Pakistan wanted and what was promised or denied. After a series of meetings with the IMF, the government said it had no intention of asking for new loans from it at all. It appears the government is not in hurry for an economic turnaround and it is acting upon a wait-and-see policy. However, the young, educated and poor cannot wait for long because their suffering has increased after economic stagnation. The mini-budget has skyrocketed prices of all essentials and the government cannot afford to continue its policy of inaction for long. After another spectacular volt face, Imran’s government has resorted to the IMF, bowl in hand.
Pakistan’s national debt has soared past US$92 billion and its servicing costs are projected to reach 30pc of the federal budget. Experts say an IMF bailout package remains the only viable option for Pakistan to arrest macroeconomic deterioration and restore the shattering confidence of the markets. On its part, the IMF also reached a conclusion that it was the last viable option for Pakistan, as the Pakistani authorities could not share a concrete plan to ensure smooth flow of dollars to meet international debt obligations. Experts say the government is still hopeful that Saudi Arabia and China will temporary bailout Pakistan but recent developments in connection with the China Pakistan Economic Corridor (CPEC) have made both Beijing and Riyadh uncomfortable.
Pakistan first announced that Saudi Arabia would be the third partner to the CPEC, but later denied it. Experts say the new government has taken two decisions which have cast the CPEC as a bargaining chip in Pakistan’s complicated relationships with other key partners. First, it suddenly reduced the potential value of the CPEC programme to US$50 billion by 2030, down from US$62 billion. It also decided to starve the western overland route from Xinjiang to the Chinese-operated Arabian Sea port of Gwadar of funding. Pakistan is also considering slashing its planned spending on a CPEC project to rehabilitate its horribly outdated national railways network. Priced at about US$8 billion, it would constitute the single largest project of the enormous programme. The drastic measures are part of Prime Minister Imran Khan’s urgent response to an unsustainable current account deficit, which is currently at a record level, and severely depleted foreign exchange reserves. It is said Pakistan’s decision to invite Saudi Arabia to develop a massive refinery complex at Gwadar created an impression in China that the CPEC is being manipulated to serve others. Riyadh must be salivating at the prospect of setting up a strategic oil reserve 120km from Pakistan’s border with Iran. Tehran, on the other hand, would not be happy at the attempt to undermine its economy.
Pakistan will have to look for an IMF package if it fails to woo Saudi and Chinese investment. However, the IMF has set harsh conditions for it. It wants Pakistan to adopt a free float exchange rate regime rather than the existing managed exchange rate. Under the managed exchange rate regime, the State Bank of Pakistan is still pumping its already sacred foreign exchange reserves in the market. It is also one of the reasons behind a $627million reduction in the reserves in a week that ended on September 28, reducing the gross official reserves to just $8.4 billion. The IMF projected a fair value of the rupee above Rs145 to a dollar as against the current rate of Rs125 to a dollar. Another condition of the IMF is to increase interest rates by 2.5pc to 4pc. At present, the key interest rate is 8.5pc, which the IMF wants to see in the range of 11pc to 12.5pc to contain inflation and narrow down the current account deficit. It also called for further hike in power and gas tariffs.
China’s US$2 billion loan before the elections helped avert the urgency of the situation and gave the PTI government sufficient time to raise additional resources for its fiscal commitments. Even before taking office, Finance Minister Asad Umar had suggested that the country would need $12 billion within six weeks. However, the government has failed to act promptly and put an extra burden on poor people in the mini-budget. If the IMF conditions are accepted for a bailout package, the life of the common man will become more miserable. It is also not a permanent solution.
The economic situation has cast doubt on the government’s ability to deliver. The young, educated, and the poor are the mostly likely victims of the economic stagnation in Pakistan, and they make the largest proportion of the Pakistan Tehreek-i-Insaf (PTI)’s electoral base. As a priority, Pakistan might focus on restoring a sustainable budget situation. This will require the government to make some painful policy choices about levels of expenditures as well as the purposes for which funds are allocated. Pakistan will need to cut or reduce funding for projects that fail to reach the most productive parts of the economy. Currency devaluation has already fuelled inflation in the country. The situation must change now.
The government must take urgent and concrete measures to put the country on the path to economic revival. Its efforts are limited to inconclusive talks only. It needs to introduce reforms to every sector. Besides austerity measures, it needs to focus on wealth generation. Import and export policies should be revised in close consultation with stakeholders. The new government has completed just about two months. It was expected to take measures, even if harsh. But it has been waiting for some miracle to happen, instead of taking practical measures. It must change its policy of inaction as people will not tolerate it for long.