PESHAWAR – The International Monetary Fund’s US$6 billion bailout package for Pakistan is in jeopardy after Islamabad announced new fuel and energy subsidies and unveiled a tax amnesty scheme amid fears the Ukraine crisis would push the country’s current account deficit to a historic high of $20 billion.
Analysts claim international rating agencies have warned that three Asian countries – Pakistan, Sri Lanka and Cambodia – may go into default on debt repayments if the prices of oil, coal and commodities continue to soar on world markets.
In the background of the global outcry over the invasion of Ukraine and sanctions on Russia, Pakistan’s Prime Minister Imran Khan signed major deals to import natural gas and wheat from Russia during his recent visit to Moscow.
Khan became the first leader to do trade deals with President Vladimir Putin’s embattled government, which in recent days has faced international condemnation at the United Nations and copy-cat sanctions from US and EU allies like Singapore, Japan and South Korea.
Khan’s defiant move to visit Russia coincides with a major gas and food crisis that is pushing Pakistan to the economic brink amid rising global market volatility and fast depleting foreign reserves, which now are mostly comprised of loans from the United Arab Emirates, Saudi Arabia and China.
Pakistan’s Ministry of Finance’s Monthly Economic Outlook Report released on February 28 warned that the Ukraine crisis was a considerable risk factor to Pakistan’s economy. It said the tensions may further rise international oil and food prices beyond their current upswings.
“The main risk for Pakistan’s economy is the deterioration in the downward correction in inflation and current account balance,” the report said.
Coal price skyrockets
For instance, the price of coal on international markets rose to an unprecedented level of $310 per ton. Pakistan relies on coal imports to fuel its power plants and the crucial cement industry. Analysts predict a power and cement shortfall in the country over the next few weeks could ignite a new round of inflation in Pakistan.
“It is a very difficult and alarming situation. We had anticipated a $28 billion trade deficit for the whole year, but ended up accumulating $32 billion in just over eight months,” Farrukh Saleem, an Islamabad-based Pakistani political scientist, economist and financial analyst, told Asia Times.
He said that by the end of the fiscal year in June, the trade deficit would be hovering around $50 billion, which he says will be very hard for the government to bridge. “I am at a loss to understand where the money would come from,” he said.
Analysts believe the Ukraine crisis will multiply Pakistan’s already many economic woes. Pakistan, they said, needs new solutions to arrest the widening trend in imports. Some say that if the war lingers on, Pakistan will be in a serious financial crisis with reserves falling below the minimum adequacy levels.
Hafeez Pasha, an economist and former Pakistan finance minister, disclosed on a recent talk show that the country desperately needed to reduce its bulging imports bill by at least $16 billion to cope with the external challenges.
He said the current account deficit was heading towards the $20 billion mark, or 6% of gross domestic product (GDP), for the current fiscal year.
The prices of oil, coal and commodities, he said, were locked in a skyrocketing trend on international markets, which will exert more pressure on the current account deficit over the coming weeks.
“The country is heading towards a serious financial crisis because the foreign currency reserves would start depleting at an unrivaled speed and may deplete to the lowest level of $7 billion if imports were not contained,” he said.
Pakistan’s current account deficit hit a record level of $2.6 billion in January 2022.
Data released by the Pakistan Bureau of Statistics on Thursday revealed that Pakistan’s trade deficit has reached a whopping $31.959 billion, an increase of 82% during the first eight months (July-February) of the current financial year.
“The $32 billion trade deficit is the highest for eight months, both as a percentage of GDP and in absolute amount. Yesterday’s hurriedly prepared amnesty will further worsen the trade and current account deficits, both already on course to be the highest ever,” said Miftah Ismail, a former Pakistan finance minister and general secretary of the Pakistan Muslim League-N (PML-N) Sindh Chapter.
He noted that the government raised petrol and electricity prices a few days ago and then abruptly announced a cut through subsidies. “Did economics change in the last few days or has politics? PTI never has the money to give relief to the people, but to save Imran Khan’s job, they find a way,” he remarked.
On February 28, Prime Minister Khan unveiled a major relief package that included measures to reduce petroleum prices and electricity tariffs amid fast-rising global inflation.
However, opposition parties tagged the relief package as a populist election ploy to boost Khan’s falling popularity. Khan announced a cut in electricity tariffs and fuel prices in defiance of his government’s commitment to the IMF, they said.
“The government has decided not to increase the prices of petrol and diesel as well as electricity tariff till the next budget,” Khan said in his televised address to the nation.
A day after the relief package’s announcement, Khan offered his third amnesty scheme to allow investors to put their undeclared money into new industries without declaring the source of their investment. The IMF, which had earlier taken a firm assurance from the government that no further amnesties would be announced, was apparently not advised.
An IMF team will take up the issue of the subsidy package and amnesty with Pakistani officials during its upcoming seventh review talks on the Extended Fund Facility (EFF) program.
In a related development, the Oil Companies Advisory Council (OCAC) – an umbrella organization of oil sector companies – has warned of a brewing petroleum crisis in case the government kept domestic prices frozen until the next budget, as per the prime minister’s announcement.
In a letter to the ministry of petroleum, the OCAC demanded payment of price differential claims arising out of recent price cuts and warned if a mechanism was not finalized, a petroleum crisis would cripple the country.
“The decision to cut the utility prices and offer amnesty comes on the eve of an IMF review. Wonder what those conversations will be like given that the steps are in complete conflict with what was agreed to by the IMF,” said Uzair Younus, a director at the Pakistan Initiative at the Atlantic Council’s South Asia Centre.
Younus claimed the government would pay the subsidies through borrowing, which the people would eventually pay back, along with the cost of interest and currency depreciation.
Farrukh Saleem said it was not the first time the government had reneged on its commitments to the IMF.
“In February 2021, Khan’s government had promised to collect 610 billion rupees ($3.22 billion) on petroleum levy and adjustment in power tariff. After getting an installment of $500 million, they had gone back on their commitment and the new finance minister refused to follow the steps promised by his predecessor with the IMF,” Farrukh said.
This time, he said, the government had agreed in early January this year that they will collect additional taxes of 310 billion rupees ($1.7 billion) on the petroleum levy but failed to honor that commitment again by implementing a fuel price cut.