IMF bailout only option for Pakistan next govt5 min read

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ISLAMABAD – The Pakistan new government would have no other option than to approach International Monetary Fund (IMF) for bailout package amid deteriorating economic situation of the country that is going from bad to worse.  Pakistan’s economic situation is deteriorating with the passage of time as rupee is depreciating sharply, foreign exchange reserves are tumbling, current account and budget deficits are widening more than projections. Trade deficit has recently touched all-time high $37.67 billion during previous fiscal year. Similarly, Pakistan’s debt has increased to Rs24.5 trillion or 72percent of the GDP of the country.

The recent developments in economy have exposed the tall claims of the previous government, which stated that economic situation has improved during last few years. The real sector of the economy had performed well during last few years, as GDP touched 13 years highest level of 5.8 percent during last fiscal year. Similarly, other sectors including agriculture, manufacturing and services sector recorded healthy growth. However, the previous government had not improved the external sector, which had gone from bad to worse.

The economic experts believe that new government after general election would have no other option than to take fresh bailout package to improve its external sector. The previous two governments-Pakistan Peoples Party in 2008 and Pakistan Muslim League Nawaz in 2013-had also immediately approached IMF for bailout packages after assuming the charge.

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Dr. Ashfaque Hasan Khan, eminent economist and former Advisor to Ministry of Finance, said that previous as well as caretaker governments are responsible for the current deteriorated economic situation of the country. “There is only one other plan than to approach IMF is to default the country,” he said and added that new government would have to take fresh bailout package to improve the external sector. Khan said that previous government had taken the measures, which resulted in current economic crisis. All the indicators are showing that economy is not performing well, as reserves are depleting due to increase in current account deficit and loan repayment, he added.

Adopting almost same stance, the former Secretary Finance Dr Waqar Masood said that the new government would have no other option than to take IMF bailout package. He has written that Pakistan’s budget deficit would go beyond 7 percent of the GDP during previous fiscal year due to massive decline in tax collection and provinces inability to give surplus budget. Similarly, other economists and experts also believe that all the economic indicators are not performing well. They said that country is currently facing a balance of payments crisis with speculation it will have to seek its second IMF bailout in five years.

The foreign exchange reserves held by State Bank of Pakistan had declined to $9.5 billion, which are enough to cover less than two months imports. The reserves would remain under pressure due to massive loan repayment and widening of current account deficit. The current account deficit would touch highest ever level of $18 billion during previous fiscal year. Pakistan’s imports have recorded at historic $60.9 billion during FY2018 that is a major threat to foreign exchange reserves.  Meanwhile, the Pakistani rupee is under pressure. Value of US dollar has recently surged to an all-time high of Rs129. Pakistan’s currency had devalued by around 21 percent since December 2017, as the dollar value has enhanced by Rs22.5. The sharp rupee depreciation has added Rs2000 billion in overall debts in last eight months.

Also Read: The cycle of mistakes  Pak an IMF Addict

Similarly, the budget deficit is expectedly to go beyond 7 percent of the GDP (Rs2.5 trillion) during FY2018. Initially, the government had set budget deficit target at Rs1.48 trillion (4.1 percent of the GDP) for the ongoing financial year 2017-18. However, it is projected that budget deficit could go beyond 7 percent of the GDP (above Rs2.45 trillion) during FY2018.

Meanwhile, Pakistan’s debt has increased to an unsustainable level of Rs24.5 trillion or 72percent of total size of economy. The public debt of Rs24.5 trillion included domestic debt of Rs16.5 trillion and external debt of Rs8 trillion. Caretaker Finance Minister has recently feared that debt would reach to 74 percent of the GDP during ongoing fiscal year. The Fiscal Responsibility And Debt Limitation Act, 2005 (FRDLA, 2005) had a limit of debt of 60 percent of the GDP. The government is all set to break the previous year’s record of foreign borrowing around $10.4 billion in a single year. Pakistan’s external borrowing could reach to $12 billion during last fiscal year.

The inflation rate, which was under control from last few years, is expected to increase due to continuous hike in petroleum products prices and rupee depreciation. Inflation is expected to touch 5 to 6 percent in next few months as against less than 4 percent of the previous year. The SBP has also already increased the policy rate by 100 bps to 7.50 percent effective from 16 July 2018 due to expected increase in inflation. The central bank has warned that inflation would increase due to unfavorable trend in international oil prices and lagged pass-through of rupee depreciation.

On the other hand, power sector’s circular debt continues to increase as it touched Rs1.032 trillion (Payables of Rs499 billion and Rs533billion loans of power sector parked in PHPL during previous fiscal year. Meanwhile, the public sector entities are financially bleeding, as Pakistan Steel Mill had closed down from last three years. Similarly, the Pakistan International Airlines and power sector entities are also giving huge financial losses.

All these indicators showed that economic situation is deteriorating, which indicates Pakistan would approach IMF in next few weeks.

Online adds: However, the IMF has made it clear that it will not extend any bailout package to Pakistan unless its conditions and comprehensive reforms agenda is implemented.

Sources said IMF has been approached for a bailout package in connection with acquisition of new loans, repayment of foreign debt and fortification of national economy.

The IMF has during initial consultations has handed over a list of reforms to Pakistan authorities.

(This news/article originally appeared in Pakistan Observer on July 19th, 2018)

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