Pakistan’s economic crisis deepens in an election year
Pakistan desperately needs to borrow to stave off a major economic crisis. But the IMF says it is in no position to service existing debts
The Pakistan government to be formed after July 25 elections will inherit a record high-trade deficit of $37.7 billion, a plunging stock market that hit this year’s lowest at 39,288 points on Monday and a currency that has been devalued by over 15% in the past seven months.
The outgoing Pakistan Muslim League-Nawaz (PML-N) government has been criticized for its economic policies, which have left the country with a balance of payments crisis, and a record debt, with the rupee being devalued three times since December 2017.
A recent International Monetary Fund (IMF) report on Pakistan says “risks to Pakistan’s medium-term capacity to repay have increased significantly… due to mounting external and fiscal financing needs and declining reserves.”
The report says, Pakistan’s external financing needs are expected to rise from $21.5 billion (7.1% of GDP) in 2017 to $45 billion by 2023 (9% of GDP). The figures suggest that the next government will have few options but to seek another IMF loan to reduce the current account deficit.
Finance Ministry sources told Asia Times that a recent $1 billion loan from China was agreed to in May this year. It will provide a much needed respite to the foreign currency reserves. Pakistan has received an additional $3 billion worth of loans from Chinese commercial banks in recent months in connection with the China Pakistan Economic Corridor (CPEC).
Finance Ministry officials, however, say Chinese loans are a short-term fix and Islamabad will need a longer-term solution. “Pakistan has borrowed up to $7 billion from China over the past two years, but an IMF bailout has become a necessity. And it is the new government that will carry it out,” said Waqar Masood Khan, a former federal secretary at the Ministry of Finance.
“It was almost as if the previous government had sworn not to go to the IMF, even though they could’ve done so in January to stabilize the economy. They practiced a lot of fiscal indiscipline and are leaving behind a record deficit of 70.1% [of the GDP],” he said, adding that fixing the broken macroeconomic framework would be the biggest challenge for the next government.
While the PML-N government continued to deny it was looking for an IMF bailout during the last few months of its tenure, the then finance minister, Miftah Ismail, had talks with World Bank and IMF officials during his trip to Washington in April this year.
Diplomatic sources confirm that a major purpose of the US visit was to discuss terms of a bailout package for after the elections, which the PML-N expects to win.
A Foreign Ministry official confirmed that Islamabad has been in talks with Washington over the need for financing, maintaining that economic deterioration in the country could allow militant elements to exploit the situation.
Miftah Ismail told Asia Times that he did not meet the US over a potential bailout loan, maintaining that help from the IMF wasn’t needed right now.
“It’s for the next government to decide, but it is too soon [to ask for an IMF bailout],” he said. Even so, the former finance minister conceded that some policies during the previous five years were flawed.
“Exports [have gone] down for three years in a row, suggesting that we should have devalued the rupee [earlier]. By keeping the rupee at a nominally high rate we hurt our exports, increased our imports and we drained our reserves. We also had to borrow money resulting in the State Bank having to intervene,” he said.
However, Ismail believes that with the latest devaluation, the rupee has regained competitiveness and should help export growth. “Also, I think we’ve now reached the accurate rupee value now,” he says. Ismail also says the current debt numbers are being viewed out of context.
“When our tenure started the debt was around 64% [of the GDP], now it is around 70.7 %. When we started the foreign debt to GDP was 21.4%, now it’s 23.5% – so it’s not that much [of an increase]. We shouldn’t look at absolutely numbers, and instead should focus on the relative numbers,” he said.
“Just for context, Japan’s debt to GDP is 228%, Italy has 123%, Singapore 111%, Sri Lanka 78% and India 68%. The debt has definitely gone up in 2018 as compared to 2013, but it’s not out of the norm in terms of how things are among international countries. “And let’s not forget we’ve spent the money on building a network of motorways, highways and power plants, so obviously that has to be done by debt – that’s all.”
The outgoing finance minister added that curtailing the budget deficit would be the biggest challenge for the next government. “In terms of the current account deficit the things that we’ve done are actually enough.”