FeaturedNationalVolume 14 Issue # 06

PTI’s predicament

Prices of all essentials have skyrocketed after increase in gas and power tariffs and the rupee’s deep plunge against the dollar. The Pakistan Tehreek-i-Insaf (PTI) government is expected to take more tough decisions to qualify for an International Monetary Fund (IMF) loan. People are already depressed and have started questioning the ability of the government to run the country and mass protests are feared if more burdens are shifted to them.


The government has increased natural gas prices by up to 143pc to recover Rs94 billion from consumers after slashing subsidies. The hike aims to make gas utility companies financially viable but will stoke inflation due to increase in the price of commodities. The decision will hurt over 9.4 million domestic users – 3.6 million of them falling in the lowest income slab and another 2.63 million in the second lowest income group. Due to the increase in gas prices for the power sector, electricity has already become expensive by 12pc. The Economic Coordination Committee (ECC) of the cabinet allowed the hike in gas prices for domestic consumers in the range of 10pc for the lowest slab consumers to 143pc for the highest slab domestic consumers.


It also hiked gas prices for commercial and industrial consumers from 30pc to 57pc, which will increase the prices of fertilizer, manufacturing units, electricity generation, cement and compressed natural gas (CNG). But it has protected five export-oriented sectors from the increase. Up to 143pc increase in gas prices is expected to follow around 35pc increase in electricity prices in the coming weeks. Gas consumers will pay an additional Rs94 billion in the ongoing fiscal year to gas utilities. The government has increased gas prices for commercial consumers by 40pc, including for special commercial connection like tandors. It increased the prices for old fertiliser plants by 50pc, and for new units up to 40pc. The decision will push the price of a 50 kilogram urea bag by Rs128. The price for the cement sector also increased from Rs750 to Rs975 per mmbtu, reflecting an increase of 30pc. CNG prices were also increased by 40pc to Rs980 per mmbtu.


The government will also have to increase electricity rates to bridge the rising deficit. It faces a Rs3.75 deficit on every unit, including theft and line losses. It is not possible to hike the price to the required level in one go. It will take months and years. If the government increases the prices abruptly, people will take to the streets as it would steeply raise prices of all daily-use items. If it delays it, it will have to pay the price in the next election. It only has one or two years to make tough decisions. Inflation has already increased by 5.1pc on year-on-year basis in September 2018, as compared to an increase of 5.8pc in the previous month and 3.9pc in September 2017, the Pakistan Bureau of Statistics (PBS) reported. The State Bank of Pakistan (SBP) said inflation was inching up, particularly from March 2018 onwards. The jump is even more pronounced in core inflation- a key measure reflecting underlying inflationary pressures in the economy.


Medicine prices are also expected to increase phenomenally. The Pakistan Pharmaceutical Manufacturers Association has demanded the government allow at least 30pc increase in prices of all medicines to meet additional expenses due to devaluation of the rupee. In a charter of demands to the government, it said that input costs had increased considerably after high exchange rates of the dollar and it was impossible for the industry to sell drugs at prices approved by the Drug Regulatory Authority of Pakistan.

Pakistan also faces tough conditions from the IMF after it has formally requested it for loan. It will also face more scrutiny over debt owed to China. The conditions will be tougher and people have to pay the price as Pakistan has been postponing solutions and not taking bold steps for decades. Prime Minister Imran Khan frantically sought loans from Saudi Arabia and other gulf nations in hopes of avoiding a harsh bailout from the IMF. After failing to find alternatives, Pakistan was forced to ask the IMF for up to $12 billion in economic assistance. The rupee dropped sharply ahead of the formal announcement. Pakistan’s GDP growth was a solid 5.8pc in 2017, but its foreign reserves have been falling sharply because of its dependence on imports. This has made it increasingly difficult for Pakistan to repay its debt. [At the time of going to press, Saudi Arabia has committed to a $12b bailout for the country. Ed]


Pakistan is seeking a bailout of $15 billion from the IMF, nearly double of what has been reported so far, due to $5 billion roll-over debt and maturity of $1 billion sukuk in March next year, according to a new report. “We assume a complete roll-over of the short-term debt, exceeding $5 billion per year. The sukuk, worth $1 billion, maturing in March 2019, may be covered by new issuance of the same size. An IMF programme would also mobilise additional financing from multilateral institutions and bilateral creditors, while borrowing from China could be limited,” said Garbis Iradian, head of Research, Institute of International Finance (IIF) for Mena region. “With the above assumptions, we expect an agreement on a three-year IMF programme by end of this year for $15 billion. Such a package would be enough to increase the official reserves to an adequate level of at least three months of imports,” the IIF analyst said in a note. The study noted that the current account deficit has widened from 1.7 per cent of GDP in 2016 to 5.8 per cent in 2018. “We expect the current account deficit to narrow to 5.4 per cent of GDP this year and 4.2 per cent next year, supported by a significant improvement in exports from the more competitive exchange rate and a moderation in growth of imports from the China-Pakistan Economic Corridor (CPEC) projects,” the IIF analyst said. The Saudi-backed Islamic Development Bank has made an offer of $4 billion in loans to be disbursed over the three-year period.


Moody’s Investors Service also noted that an IMF bailout programme is crucial for Pakistan to meet its $30 billion external financing needs. “An IMF programme will not only bridge the financing gap but also serve as a strong signal to other official sector creditors that would be crucial to meet financing requirements over coming years,” said Moody’s, a credit rating agency, in its country assessment report. Moody’s has estimated Pakistan’s gross external financing needs for ongoing fiscal year at around $30 billion, of which around $8 billion are the government’s external repayments. The financing gap is likely to be $8 billion to $9 billion, taking into account the government’s borrowing plans and Moody’s expectations of capital inflows including foreign direct investment and portfolio flows.


Finance Minister Asad Umar has claimed that Pakistan’s economy is already on the road to recovery and the next IMF programme will be its last. It could really be the last for the PTI government, if it failed to provide relief to people in few months. It came to power on the back of high hopes of the common man. It will have to take bold and quick decisions. Pakistan cannot rely on the IMF after every five years. The PTI government will have to break the cycle. The IMF programme is also not certain, as it could set harsh conditions which are unacceptable to the government. The government will have to explore other options to avoid problems if the IMF programme is not materialised.