New govt has host of options to bridge financing gap

It may consider tapping bilateral sources, go to IMF, float Euro and diaspora bonds

LAHORE: After a round of political somersaults, the new government is in place. It is hoped that the picture gets clear and the government will follow its path in due course.

The new political dispensation has inherited an economy which is in a better shape. However, the growing real economy requires huge financial doses since exports are unable to cover imports.

Multilateral institutions, economists and media experts are coming up with their estimates of gross financing requirements in the range of $20 billion to $26 billion. The economy may need these dollars provided the real GDP grows 6%.

In order to maintain the momentum of the real economy, the newly installed political government is looking for bilateral, multilateral and diaspora-related financing options.



In order to avert any political backlash, the government has called the International Monetary Fund (IMF) option as the fallback while other options are being hammered.

Specifically, there is loud talk of bilateral financing arrangements with China, Saudi Arabia and few other countries. Last year, these bilateral sources contributed around $7 billion to the economy and we may hope to get around $8-9 billion from these sources now.

Eurobonds are another external financing option which the previous government used after taking letter of comfort from the IMF.

Under the current financing conditions, getting financing through Eurobonds will be costly. In addition, overseas investors will normally subscribe to such bonds when a country is under an IMF programme. Even with this financing option, a country may get $1-2 billion at most.

Another option of external financing is diaspora bonds which could be attractive for the overseas Pakistanis. The previous government laid the groundwork in FY18, but did not proceed due to pressing election commitments.

The new government intends to capitalise on this option as soon as possible. It will recognise in due course how much dollars it could get under the current economic and political environment. However, this option hardly bridges the present wide gap in gross external financing. Then comes the lender of last resort – the IMF. Whenever a country faces problems on its external front, it goes to the IMF. The IMF provides necessary balance of payments (BOP) support to the countries that are in dire need.

Apart from the BOP support, the IMF puts certain quantitative criteria for the authorities to follow which, in simple terms, is called conditionality clause. Some experts think that the IMF conditionality is tantamount to commercial loaning which is not a proper statement.



IMF officials do macro modelling of a country and project a range of growth and inflation numbers. Normally, countries get loans from the IMF as per their quota. They may even exceed their quota if they present a strong proposal to the officials.

Some experts think that a developing country like Pakistan may need a nod of the US to get the letter of intent from the IMF. This statement also needs qualification.

In a nutshell, seeking BOP support from the IMF is quite natural under the current financial circumstances. If Pakistani officials table a sound proposal, it will have maximum chances of receiving the approval.

The key is the negotiation skills of the authorities concerned. If Pakistani officials convince the IMF that their proposal is workable and show commitment to meet certain targets, the IMF will provide them certain concessions.

On this basis, a home-grown package should be carefully crafted, debated and negotiated to get maximum benefit for the country. In this regard, the phrase ‘begging bowl’ is just a political rhetoric.

The writer is Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (LUMS)

 

Published in The Express Tribune, August 20^th, 2018.

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