Pakistan is sliding into a financial crisis and the new government led by Imran Khan will have a battle on its hands to turn around an ailing economy mired in debt.
Khan’s Pakistan Tehrik-e-Insaaf (PTI) party, which is set to be sworn in the middle of the month, faces harrowing economic challenges of fast depleting reserves and bridging a whopping trade deficit.
The PTI finance minister-in-waiting, Assad Umar, has said that the “financing gap” is somewhere between US$10 and US$12 billion and needs to be bridged “within [the] next six weeks” to ensure that the new government does not live on the edge.
Pakistan, he said, could exercise the option of an International Monetary Fund (IMF) bailout, plus Chinese and Saudi Arabian links and “Diaspora” bonds that raise funds from Pakistanis abroad to shore up the country’s falling reserves.
“Pakistan has the most liberal foreign exchange regime and literally no monitoring is carried out to curb the outflow of money from this country,” the president of Pasban-e-Pakistan Altaf Shakoor, a Karachi-based socio-political group that fights for social justice and democracy, said.
Shakoor said unscrupulous elements sent US$10 billion abroad last year through legal channels and the government had no mechanism to keep a watch on these transactions. “The government should tighten this liberal regime to check the huge dollar outflow from Pakistan,” he said.
IMF funds must not go to Chinese loans: US
Pakistan is no stranger to the IMF. It has had 14 financing programs from the Fund since the 1980s, according to Reuters. However, the US has warned that funds from any bailout package from the IMF must not be used to pay for the China-Pakistan Economic Corridor (CPEC).
US Secretary of State Mike Pompeo said last week that US officials would check on the IMF to monitor the flow of its funding and would block any attempt by Khan’s new government to use bailout funds to repay Chinese loans.
Umar brushed off Pompeo’s warning, telling Dawn newspaper: “One friendly advice to the Americans: we’ll worry about our Chinese debt, but I think they better handle their own Chinese debt first. We have a serious external debt problem – I’m not saying we don’t – [but] we don’t have a Chinese debt problem.”
A PTI source told Asia Times that Imran Khan’s economic team would make all Chinese agreements public within the first six weeks of MPs’ taking their oath in order to dissipate criticism from the US about “opaque” loan terms in Beijing’s Belt and Road Initiative. He said that in order to qualify for an IMF package worth $12 billion it would be necessary to do away with secrecy clauses about Chinese funding.
“The expected IMF bailout program will limit the scope of CPEC projects besides further devaluing the Pakistani currency, which would make the country more dependent on foreign loans,” Shakoor said. But he noted that the economic slump was also a serious security concern.
$27 billion needed for debts over next year
Pompeo’s warning has made the situation difficult for the incoming government, which will face gross external financing needs of US$27 billion over the next financial year.
In a post-program monitoring report, the IMF estimated that Pakistan’s external debt would jump to more than US$103 billion by June 2019 due to additional borrowings. It said the mounting current account deficit backed by growing external debt driven by CPEC-related outflows would lead to higher external financing needs.
“Risks to public debt sustainability have increased since the completion of the EFF [Extended Fund Facility] program. Public and publicly-guaranteed debt is expected to remain elevated at 68% of GDP [gross domestic product] by Financial Year 2023,” the IMF said.
A source in the State Bank of Pakistan told Asia Times that China had agreed in principle to lend the country US$2 billion to top up its sliding currency reserves and give the new government breathing space to implement its economic agenda.
The loan is categorized as “official bilateral inflow” on top of over US$1 billion Beijing has already released. This has lifted foreign currency reserves to US$10 billion, up from US$9 billion last week.
The stock market and currency have reacted positively to the Chinese infusion of funds. The Karachi Stock Exchange-100 index gained 750 points after China’s announced financial commitment, which coincided with the PTI’s election win. Similarly, the Pakistani rupee was up 2% against the dollar in the open market.
However, the country’s economic deterioration has been precipitous this year, with the rupee down more than 21% since December. The central bank has allowed market forces to determine the currency rate, taking into account the pressure exerted by a widening current account deficit.
And despite China’s financial injection to boost dwindling reserves, the country still needs an IMF bailout and more to service its CPEC-related liabilities in the next financial year, with US$27 billion due in coming months. There will thus be no easy economic answers for the PTI-led coalition.