International Monetary Fund’s (IMF) latest Post Program Monitoring (PPM) report leaves no doubt the country’s economy has already been struck by another crisis on external accounts.
That means Pakistan has no option but to knock on the door of the ‘lender of the last resort’ to stabilise its economy. The writing to this bitter effect is on the wall, that too in bold letters.
Yet again the prescription will be the same as Islamabad will have to control yawning twin deficits at the cost of growth. In other words they would again try to treat the symptoms instead of curing the underlying ailment. As the growth slows down in the years to come, the job market would simply start shrinking, pushing millions and millions below the poverty line.
The much-trumpeted China-Pakistan Economic Corridor (CPEC) will also start losing steam in the ultimate consequence of this gagged growth.
But why the country has repeated the bitter history by once again allowing itself to fall into this economic quagmire. There are two viewpoints to this. One school-of-thought says the political expediency on the part of ruling Pakistan Muslim League-Nawaz (PML-N), in the aftermath of Panama scandal, aggravated the instability, eroding all the hard-earned macroeconomic gains because economy was not on their radar.
Another view argues that Ishaq Dar, the former economic wizard, had built the whole economic strength story on the basis of concocted and fudged figures and this window dressing or patchwork was bound to fall apart sooner or later.
Now the countrymen have to decide who are they going to bet on in the next elections? However, had PML-N completed its tenure without incurring any political losses like ousting of Nawaz Sharif as premier, the party would not have been in position to use victim card and people could have given their verdict on the basis of their performance.
The country is heading towards elections exactly at a time when the IMF has portrayed an appalling picture of our national economy. On one side, the foreign reserves are on the decline and on the other the foreign debt and liabilities are on rise. The IMF has projected that the external debt and liabilities could touch their peak to the tune of $144 billion by the end of fiscal year 2023.
According to the IMF, Pakistan’s net international reserves nosedived to a negative $724 million in mid February 2018 against $7.5 billion in September 2016 when the last extended fund facility (EFF) program of the IMF had expired. The net international reserves are calculated on the basis of gross reserves excluding foreign exchange liabilities. Pakistan’s gross reserves held by the State Bank of Pakistan stood at $12.722 billion by mid February 2018 and the foreign exchange liabilities were $13.496 billion, which resulted in net negative reserves of $724 million.
In September 2016, the country’s gross reserves stood at $18.4 billion, while foreign exchange liabilities were recorded at $11.013 billion, thus the net reserves were $7.475 billion.
The country faces a lethal combination as on one side the gross reserves had declined from $18.489 billion to $12.772 billion in the last 17 months, whereas foreign exchange liabilities had also gone up from $11.013 billion to $13.496 billion during the period. The foreign exchange liabilities mainly went up in the shape of forward swaps, which increased from $2.680 billion in Sep 2016 to $5.395 billion by mid February 2018.
Total loss in terms of reduction in gross reserves and increased foreign exchange liabilities showed the reserves depleted over $8.5 billion in the period under review.
The pace of depletion has accelerated in the last one and half month and with existing pace and inability of Islamabad to ensure inflows on immediate basis the country will start sending SOS signals to the IMF for help in the early months of the next financial year exactly at a time when the general elections will be around the corner.
The IMF states that against the background of limited exchange rate flexibility, international reserves have significantly declined, eroding confidence. It further said maintaining a largely stable nominal exchange rate amid mounting external pressures has led to losses of international reserves.
Despite a significant external borrowing by the government, including several syndicated bank loans and an international sukuk and Eurobond issuance of $2.5 billion, gross reserves of the State Bank of Pakistan (SBP) declined from $18.5 billion at the end of the EFF to $12.8 billion in mid-February 2018—equivalent to 2.3 months of prospective imports, or 50 percent the IMF’s reserve adequacy (ARA-EM) metric.
Alongside, the SBP’s net short derivative position has doubled to $5.4 billion, bringing net international reserves down from $7.5 billion to an estimated negative $0.7 billion over the same period.
Authorities have adopted administrative measures and allowed some exchange rate adjustment of five percent to mitigate these trends, albeit with limited effect. In addition to maintaining cash margin requirements on payments for consumer imports, they have significantly raised regulatory duties on many imported intermediate, consumer, and luxury goods to contain import growth. The export support package has been extended with easier qualification criteria. Nonetheless, reserve losses have continued, pointing to limited effectiveness of these measures to date.
The current account deficit, the IMF says, has been quickly widening, reflecting strong domestic demand amid an overvalued exchange rate, fiscal slippages, and an accommodative monetary policy stance.
As a result, foreign exchange reserves have been declining, reaching 2.3 months of imports as of mid- February 2018, despite significant external borrowing. As a result of fiscal slippages in FY 2016/17, debt-related vulnerabilities have increased.
Risks to Pakistan’s medium-term capacity to repay the Fund could increase on current policies. An elevated current account deficit and increased external obligations are expected to double external financing needs in the medium-term, taking a further toll on foreign exchange reserves. Risks to this outlook are largely on the downside, given a difficult political setting and the possibility of further widening external and fiscal deficits in the coming months.
Policy efforts need to focus on arresting the widening imbalances, preserving macroeconomic stability, and supporting private-sector-led inclusive growth.
Going forward, according to IMF prescription, further monetary tightening, stronger fiscal discipline, and decisive efforts to contain losses in public enterprises would help address external imbalances and fiscal risks. Careful phasing in of new external liabilities, resuming medium-term fiscal consolidation, and accelerating other growth-supporting structural reforms will be critical to reinforce macroeconomic stability and promote higher and more inclusive growth.
On other hand, ministry of finance claimed to be in comfortable position because the ruling elites are just thinking to complete their tenure that ends on May 31, 2018 to demonstrate they never went back to the IMF in their term. Can they guarantee Pakistan will not go back to the IMF in the next one year or even three to six months after the expiry of their tenure?
It goes without saying that the die is cast and there isn’t much that can be done to undo it. Thus, the sooner we surrendered to the reality the lesser would be the pain, whereas denial would only make the stakes go higher.
By: Mehtab Haider