Caretaker govt kick-starts process of availing IMF bailout

Finance ministry, however, says option to be exercised by next government

KARACHI: Overwhelmed at the debt level and depleting foreign exchange reserves, Pakistan’s caretaker government has kick-started the process of seeking a bailout from the International Monetary Fund (IMF) to enable the incoming government to move along quicker if it chooses to exercise the option.

Very few would disagree that Pakistan would need another IMF bailout as foreign exchange reserves deplete to less than two months of import cover even after three separate rounds of rupee devaluation. With exports not nearly picking up pace and remittances failing to match, a widening current account deficit has taken toll on the country’s economy that faces several near-term challenges.

In this backdrop, Caretaker Finance Minister Dr Shamshad Akhtar said the groundwork for the IMF programme is being put in place. “Groundwork is being launched so that the incoming government, should it agree (on the IMF bailout), can proceed fast with its processing,” Dr Shamshad said while addressing media at the Pakistan Stock Exchange on Saturday.

“I (the caretaker government) can go to the IMF, but I am not … and leaving this decision on the new government.”

She said rebuilding foreign exchange reserves is an immediate and most critical priority of the government.

A massive import bill and repayments to foreign creditors have eroded reserves that dropped below $9.5 billion at the start of this month.

The minister suggested a change in approach to maintain the reserves at a stable level. “We should plan for six-month import cover instead of 3 months.”

Receipts from exports and workers’ remittances have remained insignificant to offset the massive impact of exorbitant import bill and debt servicing. The trend suggests the current account deficit would hit a record high of $18 billion (or 5.8% of GDP) in the fiscal year ended June 30, 2018, she estimated.

Similarly, the budget deficit has exceeded the set target of 4.1% of the gross domestic product (GDP) to 6.8% in FY18.

“This has soared due to some “off the budget liabilities (of the government),” she said.

The deficit would have been much more than the one realised if the government had fully spent the amount under the development programme.

“The expenditures’ overrun was Rs40 billion despite containment of PSDP (Public Sector Development Program) of the order of Rs334 billion,” she said.

The fiscal deficit has exceeded the set target by 2.7% due to shortfall of Rs679 billion in revenue collection. “Total revenue shortfall (Rs247 billion relative to original budget) would have been steeper without the tax amnesty scheme which contributed Rs89 billion,” she said.

Increased expenditure and accumulation of public debt has been due to some unexpected developments, including the fact that average interest rate rose by one percentage point, (excluding the one the SBP increased on Saturday), rupee depreciated by 14% in the last seven months and crude oil prices rose from $55 per barrel to $75.35 in the wake of international price movements, she added.

“(But) people don’t need to panic on public debt. US increased its debt during the last recession.

She added that the tax-to-GDP ratio has increased to 12.8% compared to 11.2% in the prior fiscal year, but needs to double as soon as possible.

Published in The Express Tribune, July 15^th, 2018.

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