Of short-term benefits

Pakistan is likely to turn towards IMF for a bailout as it stands on the verge of a balance-of-payments crisis

Despite official foreign inflows, Pakistan is likely to turn towards the International Monetary Fund (IMF) for a bailout as the country stands on the verge of a balance-of-payments crisis. Recently, China announced a $2 billion loan for Pakistan, of which $1 billion have already been transferred to the central bank’s account. This served to not only boost the alarmingly low level of foreign reserves but also led the rupee to appreciate against the US dollar. The Islamic Development Bank also activated $4.5 billion worth three-year facility for oil imports. Now, an international private bank will give $200 million to help the country finance its liquefied natural gas (LNG) imports.

In various interviews, Asad Umar, the man tipped to be the finance minister, has also highlighted the severity of the situation, saying that the crisis is severe and no option will be ruled out. Although these actions have slightly lifted the bleak economic situation, these are just short-term solutions. They are not sufficient to address the overall financing needs of the country, which are estimated to be in the range of $25 billion to $28 billion. If this trend continues, our already high debt will continue to swell, putting more strain on the economy and creating a headache of repaying heavy debts every year. Despite the surge in foreign exchange reserves, they are still not at a satisfactory level and more loans will lead to repayments that will eat into the reserves. In the long term, running day-to-day affairs and the overall economy through loans may not give satisfactory results.

Additionally, Pakistan also needs to give a boost to its revenue stream and check rampant tax dodge. Borrowing is not altogether bad if it is kept within a manageable ceiling as almost all countries of the world, including the developed ones, need to fuel their economies. Japan is a big example in this regard. Its debt levels are among the highest in the world, but its economy is also the third biggest. Still, hopes are high now that the incoming Pakistan Tehreek-e-Insaf government will put brakes on the borrowing spree and embark on an austerity drive to rein in lavish spending.

Published in The Express Tribune, August 4th, 2018.

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