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Pakistan’s Financial Crisis: A Negotiation with the IMF

Hannah K writes, If Pakistan is to tackle its current account deficit in the long run, the government must take substantial steps to improve the macroeconomic conditions of the country and modernize its industrial sector to become more competitive in international markets.

In 2019, Pakistan finds itself facing a dire macroeconomic crisis. Pakistan’s economic woes – dwindling foreign exchange reserves, low exports, high inflation, growing fiscal deficit, and current account deficit – are nothing new, and once again, the country finds itself knocking on the doors of the International Monetary Fund (IMF) for what will be its 22nd loan. The government has decided to approach the IMF for a stabilisation and an economic recovery programme, after the stock market suffered an over 1,300-point plunge, losing almost 270 billion Pakistani rupees ($2 billion) of its capitalisation – the highest single-day loss in a decade. [1] The current Pakistan Tehreek-e-Insaaf (PTI) government under Prime Minister Imran Khan must focus its attention on resolving its economic woes before it finds itself on the shores of bankruptcy.

The major driver of this rising current account deficit is an expanding trade deficit, which is mostly due to the rising imports under new China-Pakistan Economic Corridor (CPEC) projects and low exports in general. The previous government focused more on import-led growth strategy to finance large scale projects under CPEC. The IMF demands full disclosure of all financial cooperation between Pakistan and China, which would include infrastructure development assistance, nuclear power plants, joint manufacturing of warplanes, and procurement of submarines. The lender also wants details of more than $6.5 billion of commercial loans Pakistan has received from China in the past 2 1/2 years. [2] The IMF’s bailout package to cash-strapped Pakistan could be delayed as the global lender is pressing it to be transparent on the CPEC project and wants a written guarantee from Islamabad that its assistance will not be used to repay the loans to China. [3]

  With its domestic industry in ruins, Pakistan has not been able to rely on consistent foreign investment for more than stopgap measures. Prime Minister Imran Khan had said that only foreign investments could steer the country out of prevailing economic crisis and the government was trying its utmost to bring ease of doing business to facilitate the investors.[4] It did recently receive $2 billion from the United Arab Emirates (UAE) through the Abu Dhabi Fund for Development (ADFD), which provides concessionary development loans. This inflow has increased Pakistan’s foreign reserves from $14.956 billion to $17.398 billion in March. In February, the Crown Prince of Saudi Arabia, Mohammad bin Salman, signed seven Memorandums of Understanding (MoUs) with Pakistan, pledging up to $21 billion worth of investment over the next six years.

If Pakistan is to tackle its current account deficit in the long run, the government must take substantial steps to improve the macroeconomic conditions of the country and modernize its industrial sector to become more competitive in international markets. To make a significant impact on the current account deficit, Pakistan needs to ensure an investment-friendly environment that attracts more foreign direct investment (FDI). According to the World Bank’s Ease of Doing Business report, Pakistan ranks 136th out of 190 economies. To improve this ranking and draw more investment, Pakistan should ease customs laws and regulations, improve the security of the country, and rebrand and boost its international image as a desirable destination for tourism and industry alike. It should also encourage domestic investment through more flexible tax policies, particularly targeting small and medium-sized enterprises (SMEs). Such measures would reposition Pakistan on the international stage as stable, competitive ground for foreign investment.

Pakistan also needs to focus on building its domestic industry to expand its export portfolio and enhance its competitiveness in the international markets. In 2018, Pakistan ranked 107th out of 140 on the Global Competitiveness Index (GCI), the low ranking signifies that the Pakistani government needs to take measures to stimulate economic growth and provide favourable business environment. Broadening the country’s export portfolio and exploring new export destinations such as Eastern European and Central Asian countries could revitalize foreign exchange earnings. As a security-oriented state, Pakistan’s priority has never been the economy, but it now needs to focus more on geo-economics over geostrategy.

Currently, Pakistan is not taxing its agriculture sector and large businesses are often given big tax breaks. Hence, Pakistan needs to broaden its tax base – strengthen tax collection coordination at the national and provincial levels to ensure that revenue targets are met. These steps would go a long way to addressing the myriad financial and deficit issues stemming from the country’s weak governance.

Measures to strengthen Pakistan’s fiscal and debt dynamics will likely be a major cornerstone of the IMF deal, with the end-goal of narrowing the budget deficit and stabilising the debt-to-GDP ratio through austerity measures. Recently, Reza Baqir, an economist with the International Monetary Fund (IMF), has been appointed as Governor of the State Bank of Pakistan (SBP) for three years. The key appointment came only weeks after Finance Minister Asad Umar was asked to step down amid vital bail-out negotiations with the IMF, suggesting the government wants to overhaul its financial team. The coming months are going to be tough for the current government as the rupee is expected to depreciate further, causing inflation to rise. Pakistan’s economic crisis cannot be resolved overnight. Support from the IMF and friendly countries like Saudi Arabia, China, and the UAE will only provide some breathing room in the short term to its shattered economy. Promoting manufacturing by creating a more investment-friendly environment, broadening its tax base, and encouraging innovation and modernization in export-led industries are just some of the most urgent measures the government can take to address the growing fiscal and current account deficit.  Pakistan must take advantage of this moment of hard-won reprieve by building a truly stable and sustainable economy before it once again finds itself digging its own economic grave – and that of its people.

Endnotes:

  1. “Pakistan to seek IMF bailout to overcome crisis” [Online: web];

Accessed 5th May 2019;

URL: https://www.khaleejtimes.com/international/pakistan/pakistan-to-seek-imf-bailout-to-overcome-financial-crisis

  1. “Pakistan, IMF Launch Final Round Of Talks On $8 Billion Bailout” [Online: web]

Accessed 6th May 2019;

URL: https://www.rferl.org/a/pakistan-imf-launch-final-round-of-talks-on-8-billion-bailout/29910590.html

  1. PTI, Islamabad(2019); “IMF may delay bailout package to cash-strapped Pakistan”,

[Online: web] Accessed 5th May 2019;

URL: https://www.thehindubusinessline.com/news/world/imf-may-delay-bailout-package-to-cash-strapped-pakistan-report/article26843679.ece

  1. “Foreign investment to steer country out of economic crisis: PM”, [Online: web]’

Accessed 5th May 2019;

URL: https://www.brecorder.com/2019/05/04/494650/foreign-investment-to-steer-country-out-of-economic-crisis-pm/

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