Pakistan’s total debt is 82.6 per cent of the GDP. According to experts, for upcoming debt servicing we need an injection of $12 billion into the economy. Wherefrom to get the money? In such a situation, an IMF loan seems to be the only viable option mainly due to its nominal interest rates, and goal of long-term institutional and structural reforms.
But to reap the programme’s long-term benefits and establish credibility, the government will need to follow through with IMF’s reform agenda, which broadly include reining in current expenditure and domestic borrowing, broadening the tax base, restructuring and offloading PSEs, introducing business climate reforms along with serious legislative work.
As pointed out by some economists, this was not the case in September 2016 when Pakistan completed its first IMF Extended Fund Facility (EFF) programme for $6.64bn. The programme spanned years and was extended in quarterly tranches of $500 million, made conditional on meeting mutually agreed performance criteria, structural benchmarks and prior actions in the financial, fiscal, three power and social sectors.The Fund reviewed Pakistan’s economic and financial indicators every quarter, and by the end of the programme, the country had achieved much-needed stability: an unprecedented increase in foreign exchange reserves at $23bn, contained fiscal deficit at 4.5pc, reduced inflation at 3pc; tolerable current account deficit around 1.5pc of GDP, and increased revenue collection at 12.4pc of GDP.
Throughout its duration, the programme became a moot point with critics describing its conditions as detrimental to Pakistan’s economic growth. This has created a misperception among the general public, when in fact the Fund presents a feasible option for governments to quickly shore up depleting foreign exchange reserves and arrest deterioration of balance of payments. Problems resurface when, at the end of the programme, the prudent policies and reform agendas are abandoned, and states revert to unchecked expenditures through short- and medium-term loans, consequently leading to renewed economic instability. Since the programme, Pakistan faced a similar situation, with fiscal and current account deficits ballooning within a year, provincial surpluses going into the red and tax administration and structural reforms forgotten midway. The unchecked economic spiral led to foreign exchange reserves once again hitting dangerously low levels (around $10bn), thus taking us back to the IMF.
Even if the IMF is bypassed in favour of other bi- and multi-lateral funding sources, the government should be proactive and continue IMF-led reforms by further amending State Bank and SECP legislation to enhance their autonomy, so the SBP can formulate an independent monetary policy and the SECP can better regulate and monitor all entities conducting business; changes to anti-money laundering/countering financing of terrorism regulations to arrest the incidences of such crimes; extend FBR’s authority and jurisdiction for efficient tax administration; enforce a medium-term debt management strategy to rationalise reliance on medium-term loans; implement a public-private partnership framework to synergise with the private sector for efficient management and financing of infrastructure and development projects.
The government should also develop a strong policy framework consolidating the current gains and future potential of CPEC projects. If fully capitalised and integrated into institutional reforms, the projects can result in real, sustainable, export-led growth shifting the total productivity factor curve outwards for Pakistan. But reaping long-term gains from these will eventually rest on outpacing the eventual amortisation and debt servicing via sectoral growth and competitive exports.
However, reverting to the Fund for an immediate bailout should not be written off, as the loan conditions can provide the much needed impetus to replace Pakistan’s existing anachronistic systems. Turkey’s widely hailed economic turnaround of the early 2000s was achieved on the back of a similar IMF-led programme. In fact, it is in our national interest to continue with the reform agenda of the EFF programme in the fiscal and structural sectors for long-term growth and systemic improvements.
While discussing the IMF, some experts have suggested that China could be an alternative solution to our problems. China’s $1 trillion multi-continent Belt and Road Initiative (BRI) that seeks to reshape global trade and commerce has given new options to countries in the Global South. Since the beginning of the China-Pakistan Economic Corridor (CPEC) in 2016 — a flagship BRI project — political and economic ties between Beijing and Islamabad have intensified rapidly. China has a vested interest in preventing an economic meltdown in Pakistan, which would endanger its existing and planned investments. Already, it has lent $7.4 billion outside of CPEC over the last 13 months to support the external sector. This is more than the $6.4 billion IMF programme Pakistan underwent during 2013-16. So in a sense, China has already given us a mini-bailout.
Apart from protecting its investments, China has larger strategic reasons for replacing the IMF as Pakistan’s chief source of foreign funding. As it competes with the US for global influence, its strategy hinges on expanding alliances through trade and investment, with the BRI as the linchpin in this grand scheme. In this context, CPEC is an important node in the BRI chain. Special economic zones (SEZs) to be set up in Pakistan will serve as bases for export-oriented Chinese industries, helping them remain competitive as labour costs inside China rise.
Another critical factor is energy security. Currently, about 80% of Chinese energy imports pass through the narrow Straits of Malacca linking the Indian Ocean with the South China Sea, which Beijing believes could be blockaded by the US navy in a major geopolitical standoff. A planned pipeline in Pakistan allowing China to directly transport oil from the Persian Gulf via Gwadar port, along with similar projects in Thailand and Myanmar, seeks to establish alternative energy supply routes. Needless to say, the possibility of Chinese financial assistance expands Pakistan’s menu of choices, in comparison with the past when the IMF was the only option. By leveraging China’s CPEC-related strategic imperatives, the PTI government has an opportunity to secure a bailout with less odious terms than in the past.