Balance of payments worsens: Pakistan could knock at IMF’s doors in April

Published: March 26, 2018
Discussions likely to begin during World Bank-IMF spring meetings in Washington next month. PHOTO: REUTERS

Discussions likely to begin during World Bank-IMF spring meetings in Washington next month. PHOTO: REUTERS

ISLAMABAD: The PML-N government has accepted the International Monetary Fund’s (IMF) precondition to let the rupee depreciate by over 4% to qualify for any fresh bailout package that is needed to avoid a default-like situation.

Notwithstanding Adviser on Finance Miftah Ismail’s statement that the government is not seeking any IMF assistance, the Washington-based lender is said to have been obliged to steer through highly difficult 2017-18 and 2018-19 financial years.

The government is expected to take up the issue of new IMF financing in April during World Bank-IMF spring meetings in Washington.

Ismail does not see any further downward readjustment of the currency in the near future. However, those who are in the know of things, both in the central bank and the Ministry of Finance, maintain that lobbyists at home and abroad are working to persuade the authorities to go for another depreciation before June.

Is there a balance of payments crisis in the making?

Insiders described it as a ‘panic situation’ in the Ministry of Finance and the word ‘bottom line’ is being used for seeking an emergency $6-7 billion in IMF assistance to make timely repayments and tackle the looming balance of payments crisis.

In the absence of any credible economic team, two officials – Talib Balouch and Khaqan Najeeb – are considered ‘opening batsmen’ of the finance ministry to take important decisions.

One is calling for seeking IMF assistance to ward off the impending balance of payments crisis while the other is suggesting acquiring commercial loans continuously at high mark-up. Since the World Bank and the Asian Development Bank (ADB) have linked their annual assistance to the IMF’s signal, seeking commercial loans, particularly from China and Chinese commercial banks, are seen a viable option to manage external inflows. A total of $1.3 billion in commercial borrowing had been obtained in the last few months which also included $900 million in just one quarter. There is no strategy how to deal with the intensifying balance of payments crisis.

Economic mess

Successive secretaries of the Ministry of Finance and governors of the central bank are being held responsible for having created the current economic mess due to which the fiscal and current account deficits have increased disproportionately causing new difficulties for the country.

Since December last year, the government has let the rupee weaken by about 10% that has multiplied the country’s external debt. What if the IMF dictates are accepted to push the currency down by another 13% as has been demanded in every meeting with the Pakistani officials?

Uncertainty and gloom over the economic situation have grown following the release of post-programme monitoring report by the IMF that believes that risks to macroeconomic stability are increasing and that widening fiscal and external deficits could land Pakistan into new trouble. The timing of the report has been termed intriguing by independent economists as it eroded investors’ confidence. They say IMF officials were ‘partners in crime’ as they had been waiving things by giving a clean bill of health to the Pakistani economy during the three-year $6.67 billion Extended Fund Facility that ended in September 2016.

The report was unprecedented in terms of pointing out serious risks that IMF officials believe surfaced after the completion of the programme. In fact, they are suggesting that as long as the IMF programme continued nothing happened and the country’s economy started collapsing when there was no oversight available by them.

Who does not know that the country is witnessing multi-dimensional economic challenges, the foremost of which is how to prevent insolvency that is coming in the wake of worsening balance of payments problem?

Balance of payments: Evolution of policymaking to control budget deficit

The present government will complete its five-year term by early June this year and by that time external debt and liabilities would have crossed $100 billion that also includes the $2.5 billion added by the latest depreciation of the rupee.

The gross failure in increasing exports and home remittances coupled with foreign direct investment (FDI) and portfolio investment and other non-debt creating inflows have caused serious balance of payments problem.

Strict stabilisation policy

Now, it appears that everything revolves around IMF assistance or acquiring more and more commercial loans from China. But Chinese authorities may not be that forthcoming and eventually this or the caretaker government will have to knock the doors of the IMF to help rescue the economy.

This time around, Pakistan will be forced to go for a strict stabilisation policy in the name of austerity. But there is a growing consensus that so-called stabilisation has caused problems to the economy’s growth.

IMF officials, it is said, are more concerned about getting back their $6.6 billion and in case they decide to honour yet another funding request, they will pressurise the government to implement taxation and energy-related reforms besides cutting development budget to restrict fiscal deficit. The deficit, officials concede, will go as high as 7% while others believe it might end up at 8% considering the huge resources being doled out to PML-N legislators to win elections.

Fiscal deficit, which is considered the mother of all economic ills, continues to widen as the gap between income and expenditure has grown over Rs2 trillion. How could the FBR deal with this issue without reforming its system is anybody’s guess?

The government plans to have its revenue collection target fixed at Rs4.5 trillion in 2018-19. Is it achievable considering the usual shortfall of Rs200 to Rs250 billion seen every year for the last many years?

Root cause of fiscal problem

The seventh National Finance Commission (NFC) award that gave 57.5% share to provinces is now becoming the root cause of the fiscal problem. Things further aggravated due to the 18th Constitution Amendment which empowered provinces without enhancing their capacity and wisdom to spend resources.

Need to study medium-term effects of rupee devaluation

Those two things have, in fact, emptied the federal treasury. For the current fiscal year, the federal government under the National Finance Commission (NFC) Award is extending Rs2.4 trillion to the provinces and retaining just Rs1.6 trillion to manage its responsibilities.

Without addressing the NFC issue, fiscal problems will continue to swell and in the absence of a certain strategy, the current account deficit can’t be reduced which is widening due to unparalleled imports and declining exports.

The caretaker government and the new elected government will have a gigantic task to address the issue of twin deficits. The manipulated figures would not do the trick to tackle serious challenges.

Ironically, when major economic indicators including imports and exports, fiscal and external deficits, revenues and FDI are deteriorating, the government is showing 14% industrial growth.

From where is this growth coming? The sad part of the problem is nobody is taking the economy seriously.

The writer is the recipient of four national APNS awards and four international awards for journalism


Published in The Express Tribune, March 26th, 2018.

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Reader Comments (14)

  • Hashim
    Mar 26, 2018 - 11:45AM

    We first need a letter of comfort from Trump before we can get one from the IMF :) Our boys in green are working on pleasing Trump. If they succeed we will have no shortage of dollars to add to our external debt. We can continue to mismanage the economy confident that as long as we have nuisance value we can extract dollars from the West.Recommend

  • cuban
    Mar 26, 2018 - 1:40PM

    Interesting article especially given the statements by the govt. If true it’s another example of why the govt has little credibility. Recommend

  • Babar
    Mar 26, 2018 - 2:02PM

    could someone please explain me the following

    “by that time external debt and liabilities would have crossed $100 billion that also includes the $2.5 billion added by the latest depreciation of the rupee.”Recommend

  • Arif
    Mar 26, 2018 - 3:30PM


    This statement is not correct. Despite devaluation, liabilities in dollar terms will not change (obviously as these are being reported in dollars).Recommend

  • Hasan.Khan
    Mar 26, 2018 - 3:31PM

    The entire fiscal space has to be revamped including FBR policies,foreign exchange management ,presumptive tax regime and major policy decision on power sector and in real terms subsidizing power (electricity).
    It is for the Government to consider if the require a well respected banker to Chair the State Bank of Pakistan or otherwiseRecommend

  • Babar
    Mar 26, 2018 - 3:53PM

    @ Arif.

    Exactly, i thought i was missing something.

    Anyways thank you.Recommend

  • Danish
    Mar 26, 2018 - 4:58PM

    Pakistan should ask China for loans. They can deduct it when CPEC make profits. That way it will good for both.Recommend

  • Zaida Parvez
    Mar 26, 2018 - 5:00PM

    At least we are the happiest people in the region.
    Maybe it is true – poor people are happy.Recommend

  • shehryar malik
    Mar 26, 2018 - 6:45PM

    yes agree with arif that depreciation will not add any extra amount to external debt, but talking about the total figure of $100 billion given, we might not reach that figure till june as stated in article but we are very close as external debt nowadays is around $92-93 billion which itself is lot Recommend

  • powayman
    Mar 26, 2018 - 7:17PM

    @Hashim: We can continue to mismanage the economy confident that as long as we have nuisance value we can extract dollars from the West.
    Not sure that strategy is going to work with Trump. So far Trump has made good on his promises to go after China, N Korea etc. Recommend

  • vinsin
    Mar 26, 2018 - 7:56PM

    Lets say that Pakistan economy is 300,00 Billions Pakistani Rupees. If a dollar equals PKR 100 then economy is 300 Billions Dollar. Lets assume that at that point external debt is at 33% of economy that is 100 Billions Dollar. Now PKR decrease by 10% i.e 1USD = 110 PKR. In that case Pakistan economy nosedive to $272 Billions and external debt increased to 36.75% of GDP. Now that is 367 increment on basis point. Now at 33% the debt should be $90.66 Billions. But because debt cannot be changed from $100 Billions that is seen as an increment of $9.33 Billions.Recommend

  • Ali
    Mar 26, 2018 - 9:49PM

    Can someone please go back and read over Ishaq Dar’s last opinion/editorial piece from this website?
    What he said wasn’t an issue turns out to be a huge problem.

    If you ask the PML-N now they will say it’s the fault of the dharnas.
    Otherwise the country would be richer than Japan, or a tiger economy at the very least.Recommend

  • mastishhk
    Mar 26, 2018 - 10:55PM

    @ Babar…Liabilities in dollar terms won’t change but the dollar itself would become expensive. Recommend

  • South Indian
    Mar 27, 2018 - 8:22AM

    Notice how the writer cleverly segues onto the 18th Amendment and blames mismanagement of their financial awards by provinces to support the Bajwa doctrine thereby leaving no doubt in anyone’s mind about the allegiance of the writer.Recommend

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