‘IMF could impose non-economic conditions on Pakistan this time’

Pasha warns lender could exploit situation by asking to cut back on CPEC size

ISLAMABAD: Pakistan is in an incipient financial crisis which, unlike previous ones, may prolong and the International Monetary Fund (IMF) could exploit the situation by asking the country to cut back on the size of the China-Pakistan Economic Corridor (CPEC), former finance minister Hafeez Pasha cautioned on Monday.

“[And] When Pakistan knocks on the IMF’s door, the United States being the largest shareholder could impose some “non-economic” conditions,” Pasha warned while speaking at a seminar organised by the German institute Friedrich-Ebert-Stifting.

Pasha has in the past negotiated several bailout packages with the IMF and is critical of the fund’s policies towards Pakistan.

By September next year, the government will run out of foreign currency reserves which will trigger a financial crisis, Pasha said.



According to his forecast, Pakistan’s external financing needs will be $32 billion for the next 16 to 18 months, of which only $8 billion will come through CPEC financing and foreign direct investment whereas the government will have to resort to borrowing to cover the rest.

Pakistan has been facing difficulties in managing its external account due to mounting foreign debt repayments and a widening current account deficit. The country raised $2.5 billion last month by floating bonds to take pressure off the falling foreign exchange reserves.

“Financial crises of 2008 and 2013 were the result of major price shocks, but this time the crisis will be the result of structural faults in the economy,” Pasha warned.

“Instead of undertaking much-needed reforms, the government is conducting a ‘holding operation’ that is aimed at keeping foreign currency reserves at a level that will allow it to defer the crisis till June next year,” Pasha said. “During this period, the economy will be allowed to bleed and no major reforms will be undertaken.”

The former finance minister predicted that the real challenge would emerge after departure of the caretaker government. “By that time, cracks will widen and foreign currency reserves will fall below $3 billion,” he said.

Pasha was of the view that the only way out would be another bailout from the IMF. “But this time, the IMF will not allow a joyride to Pakistan due to change in the US policy stance towards Pakistan.”

“We may be told that CPEC’s size needs to be cut down with the US asking for some non-economic conditions as well,” he added. “This is a crunch time and the Pakistan Army is rightly worried as it is aware of the strong link between economic conditions and national security.” He suggested that 5% depreciation of the rupee earlier this month could be the result of an arrangement under which Pakistan would let the currency fall in return for a Letter of Support from the IMF to borrow from other international financial institutions.

He predicted that despite the holding operation, the gross foreign currency reserves would fall to $10 billion by June next year including the $6.5 billion that the central bank had borrowed from commercial banks under a swap arrangement.

Pasha said currency swap borrowings had stood at $5.8 billion by the end of August and they jumped to $6.5 billion by November-end.



“Unlike 1998, this time the central bank will have to return the currency swap loans and it should not fiddle with foreign currency accounts,” Pasha emphasised.

In addition to problems on the external account, he said, the fiscal policy would also remain expansionary and the central government’s borrowings from the State Bank for budget financing could exceed Rs1 trillion by the end of current fiscal year.

“Over the past four and a half years, the government has pursued a path of presenting unrealistic statistics. Indicators like debt-to-GDP-ratio, inflation and economic growth are manipulated. The problem is that the government has started believing in its own manufactured data,” said Pasha.

Published in The Express Tribune, December 19^th, 2017.

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