Pak Economy: Between the devil & the deep sea

…a tale of IMF bailout & CPEC commitment

Pakistan economy is virtually between the devil and the deep sea as it has to balance the intended ‘International Monetary Fund (IMF)’ bailout with financial commitments involved in ‘China Pakistan Economic Corridor (CPEC)’. This is in spite of the fact that China is a member of IMF, with a voting share next only to US and Japan. And, China has officially endorsed Pakistan’s IMF bailout plan. Pakistan was getting woefully short on working-out balance of payment, with dwindling foreign exchange reserves. While the initial estimate for bail-out package was USD 6 to 7 billion to address the mounting financial crisis faced by the cash-strapped country, it is related that Pakistan might be prompted to ask for much higher amount. The higher ask could be based on an assessment by a combine of finance ministry and State Bank of Pakistan. The combine is reported to have worked out servicing an external debt of USD 11.7 billion in current fiscal year 2018-19.  

Pakistan has been borrowing from IMF, multiple instances could be quoted. It amounts to 12 bailouts since late 1980’s. Nawaz Sharief led PML (N) government negotiated a bailout of USD 6.6 billion; the very year it won the election to form the government in 2013.  However, the scenario in the present instance is different. In the initial days of Imran led Pak regime, US foreign secretary reacted adversely, as the bailout news hit the headlines. Mike Pompeo warned that US would be watching closely, whether the intended IMF bailout is used to service Chinese loans. While US administration does not have the final word on IMF packages, it could prevail to the extent of making it difficult for Pakistan to work out the IMF deal. US administration has not lowered its guard, though there have been enough indications that Pakistan might be allowed to get away with the IMF package. 

There have been many diplomatic contacts in recent days between US administration and Imran led Pak regime. Apart from Mike Pompeo engaging Pakistani leadership on his Islamabad visit, foreign minister—Shah Mahmood Qureshi used his New York UN General sojourn to visit Washington. He met secretary of state—Mike Pompeo and national security advisor—John R. Bolton. The strident tone of US administration evident in President Trump’s New Year tweet severely censoring Pakistan has eased considerably. That however does not translate to Pak-US relations returning to the heydays of yesteryears. There are obvious strains, mostly related to Afghanistan, where US would like Pakistan to get Af-Taliban to negotiating table to sort out a deal favourable to US. That is indeed a tall order, a deal difficult to work out.     

IMF package linked to CPEC commitments is a corollary that follows from US concern on Chinese involvement getting deeper and deeper in Pakistan. CPEC is taken to be the most vital limb of Chinese ‘Belt Road Initiative (BRI)’. The Eurasian BRI Initiative involving 60 plus nation states is fast becoming America’s nightmare, as it has the potential of upsetting the world trade balance. The Chinese though have professed their commitment to present order largely US led, which amounts to not upsetting the applecart. BRI/CPEC commitment nevertheless stays. CPEC is 60 billion dollars plus deal and expanding, committed to widening the infrastructure and energy potential. Pakistan has been bending backwards to assure that deals with China are long term commitments, and IMF package will not be used to service Chinese loans. Pakistan has shown a willingness to share with IMF, the details of Chinese deals. Imran’s Khan’s PTI while in opposition was demanding transparency in Chinese deals. As it stands, they might be constrained to prove it to IMF that the deals are indeed as transparent, as claimed.               

IMF packages don’t come without conditions. The conditions could extend from doing away with subsidies, curtailing government expenditure, and reducing losses in state institutions. These money saving devices are meant to reduce non-development expenses, thus bring down the budget deficit. It is related that IMF could ask Pakistan to widen its tax net, which is restricted to mere one percent of population, as per some estimates. Inability to widen the tax net has remained a perpetual weakness of Pak economy.  Given the huge number of people below poverty line, it is not easy to do away with subsidies totally. It could result in a political backlash. Imran’s PTI has already suffered a setback in by-elections held last week, on October, the 14th, losing seats that it had cashed in general elections. It is widely believed that hiked-up prices of gas contributed to losses. In the coming days, government is expected to hike electricity supply bills, as production per unit costs more than the rate charged.     

While it is already in headlines that Pakistan is seeking IMF package, days back on Wednesday, October the 17th precisely, Imran Khan stated that Pakistan is still exploring alternatives to IMF bailout with friendly countries. Imran’s statement could be the fallout of the strident conditions of IMF bailout. Balancing IMF package with multiple commitments to masses in Pakistan could be a difficult task. The bailout with IMF loan has still to touch serious negotiating stage, and Pakistan rupee is already losing in value to dollar. While the interbank rate of US dollar was Rs 124 a few days back, it rose in the market to 138, before lowering to Rs 133.  It was the result of speculations that IMF could ask for devaluing currency. All said and done, economic expert say that there is no alternative to IMF, through Imran might wish otherwise.

Yaar Zinda, Sohbat Baqi [Reunion is subordinate to survival]

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