Federal Finance Minister Asad Umar stated that the government had worked out that it would need to borrow 9 billion dollars to manage the national economy.
It is yet to decide whether to seek an International Monetary Fund (IMF) bailout package. If it decides to seek one, it would not be the first but the 13th time.
Pakistan’s experience indicates that bailout packages in general and the IMF packages in particular, do not get out of the debt trap.
The last IMF bailout package rather than on reforming the tax system, but relying heavily on procuring loans from external sources to shore up foreign exchange reserves
External debt of 30 billion dollars was incurred during the past five years while keeping the rupee overvalued that led to declining exports while imports becoming more attractive leading to a current account deficit.
Asad Umar stated that the government would announce reforms in the tax measures contained in the Finance Bill 2018 next week, which would require approval from the parliament.
An attempt would be made to raise revenue the budget for 2018-19 through improved FBR governance and a tax structure.
The government has decided to cut down on its own expenditure through reducing its perks and privileges and banned all discretionary grants by the President, Prime Minister, federal cabinet members and members of the National Assembly.
These measures are designed to contain the budget deficit with dwindling foreign exchange reserves and a high current account deficit. The government is going slowly and carefully a lot of time is not available to
Reforms are necessarily required and IMF package, which economists maintain is the only alternative.
Decision on IMF Federal Finance Minister Asad Umar stated that the government had worked out that it would need to borrow 9 billion dollars to manage the national economy and had yet to decide whether to seek an International Monetary Fund (IMF) bailout package.
It must be remembered that Pakistan was on an IMF programme at the time, with monitoring by Fund staff, the Fund mission leader must bear part of the responsibility for these unsound policy decisions.
Pakistani governments in the past failed to undertake institutional reforms or formulate and implement policies focused on reducing the deficit through reforming the tax system and decreasing current expenditure.
Last not the last but not the least, shutting down avenues of corruption, nepotism, capital flight and money laundering was missing in this context.
Two months of the current year have already passed and any further delay in implementing measures would increase the load on the country and its people during the remaining 10 months of the year.
Asad Umar stated in the Senate that the government would announce reforms in the tax measures contained in the Finance Bill 2018 next week, which would require approval from the parliament.
China kept ties close with a reported USD 2 billion loan just days after the election of a new Pakistani premier. The announcement caused Pakistan’s rupee to jump the most.
Moody’s warning about the Pakistan economy
Pakistan is facing external pressures rising from increasing imports of capital goods as well as investments under the China-Pakistan Economic Corridor (CPEC).
Moody’s fairly analyzed that the external pressure has been continually increasing and this may further worsens the issue of declining foreign exchange reserves.
The newly elected government has shown its interest to approach International Monetary Fund (IMF) for a bailout package but at the same time it is also considering other options like borrowing from China and Chinese banks.
Pakistan’s imports have become a great worry for the economy. Imports could not be controlled despite numerous steps taken by previous government as well the caretaker government to halt the widening trade deficit.
CPEC related investments have become one of the major contributors to the increasing imports bill.
Pakistan has a $56 billion agreement with China, which will be invested in numerous infrastructure, energy and communication projects.
Of the total $55.85 billion imports, China continues to hold top spot at the list of countries with highest exports to Pakistan, with total bill from it reaching $11.45 billion during fiscal year 2018. According to a State Bank report, total import bill was much higher since the import of services in fiscal year 2018 also reached $10.49 billion taking the total import bill as high as $66.3billion.
Current account deficit likely to slow down
Moody’s said the current account deficit is likely to settle lower at 4.8percent of gross domestic product (GDP) during fiscal year 2019 down from 5.7percent recorded during the fiscal year 2018.
In Moody’s opinion the foreign reserve coverage of external debt repayments remains high however; the coverage for external debt might weaken in medium-term.
Pakistan has been paying heavy cost of external borrowing as it had to pay $7.5billion in fiscal year 2018 as debt servicing.
Rise in foreign exchange reserves is possible through and in combination with an IMF program, said Moody’s.
The State Bank’s reserves decreased by $5.1billion in fiscal year2018 falling to $9.5billion in July 2018 from $14.58billion in July 2017.
Moody’s said that around one-third of government debt is designated in foreign currency and is exposed to currency risk since slight depreciation could raise inflation.
During fiscal year 2018, Pakistan Rupee went through three rounds of depreciation, collectively taking the currency down 20percent against the greenback.
Moody’s warned that any prompt hike in policy rate can increase overall borrowing costs.
The State Bank in its last monetary policy decision on July 14 had increased interest rate by 100 basis points to 7.5 percent in an effort to decline the boiling economy and control rising inflation.
“Pakistan’s debt affordability would weaken significantly from already low levels in the event of a sharp and sustained increase in the cost of debt,” said Moody’s view on Pakistan.
It also emphasized the need to increase in capital inflows in order to help the overall health of the economy.
Moody had, in June, downgraded the outlook on Pakistan’s rating to negative from stable.
It now warns that “sovereigns with relatively-high debt burdens, weak debt affordability and smaller buffers are especially susceptible to deterioration in their credit profiles in the event of rising funding costs”.
The credit agency mentions that the Pakistan rupee has experienced substantial depreciations against the dollar in about a year’s time.
World Bank advises govt to maintain long term policies
The World Bank has advised newly elected government to maintain long-term policies for private sector to maintain higher economic growth and human development, and has showed its inability to enhance funding to Pakistan beyond existing commitments under the ongoing country assistance strategy (CAS). A visiting delegation of the bank has ensured full support to macroeconomic stabilization, inclusive growth and human capital development under the next five-year CAS 2019-24.
The delegation emphasized that for Pakistan to achieve faster growth, it would need to focus on private sector policies for a longer time horizon in order to encourage private investors to unleash their true potential.
The Vice President assured the minister that his Bank will continue its support to help implement the agenda for economic growth and social development currently being pursued by the new government.
The achievement of economic stabilization should be an important objective for the government and emphasized the importance of human capital development, macroeconomic stabilization and inclusive growth.
The government will take all the requisite measures to implement the economic reform agenda to help put the economy back on track.
The new government desired to enhance the role of private sector and for that, private sector will be encouraged to take the lead in economic development of country.
The Bank has committed an indicative financing of $11billion to Pakistan under CAS, 2014-19.
This includes an International Development Association (IDA) backed lending of about $1.1bn per year, besides additional regional IDA allocations, particularly in trade and energy and International Bank for Reconstruction and Development lending of about $500 million every year.
The support will be aimed at fixing the macroeconomic imbalances. The bank has committed an indicative financing of $11billion to Pakistan under CAS 2014-19.