Without massive international support in the near future, Pakistan’s economy is certainly headed towards debt default. The numbers speak for themselves. In FY 2018 (ie the year ending June 30, 2018), Pakistan had a current account deficit of $18.1 billion according to the State Bank of Pakistan, and this deficit was running at $3.8 billion for the first quarter of the 2019 fiscal year. In other words, at the current run rate, Pakistan needs to borrow approximately $15-16 billion of foreign exchange every year only to fund this deficit. The deficit widened sharply under the PML-N government — external debt rose to $95.1 billion as of June 30, having increased by 46% during the prior three years, largely to fund the difference between our imports and exports. In FY 2018, Pakistan imported $56.0 billion worth of goods, but exported only $24.8 billion.
In other words, Pakistan has long been living beyond its means, and with foreign exchange reserves now below $8.5 billion, time has run out. Pakistan has enough foreign exchange to pay for only six weeks of imports.
This newspaper recently reported that at a senior level government meeting, Prime Minister Khan was told that a bailout by the IMF remains the only viable option — and that “no major and continued financial relief was in sight from friendly countries.” The only surprise here is why it took the PTI government so long to get to this conclusion. Saudi Arabia has provided some token help, and it is unclear what the Chinese have offered, if anything. China is under international scrutiny for overextending poor countries and then claiming underlying assets when those countries cannot pay — their takeover of Hambantota port in Sri Lanka being a case in point. Though clearly the relationship with China is an important one, our erstwhile ‘best friend’ cannot be relied upon to bail Pakistan out. Neither can Saudi Arabia.
The divergent fates of Venezuela and Argentina, both of which recently faced debt-servicing issues, are worth-examining. Venezuela’s government is sanctioned by the US but has close economic relations with China and Russia. When Venezuela had trouble meeting obligations, there was talk of a bailout by those countries which did not materialise. Last year, Venezuela defaulted on its international debt and is facing economic collapse — shortages of food and medicine, a refugee crisis and inflation expected to reach over one million per cent. It is thought that Venezuela is still servicing debt owed to its would-be saviours. Argentina meanwhile took a different route — a new president was elected at the end of 2015 who strengthened relations with the US, courted international investors and recently secured the largest bailout in IMF history of $57 billion. Though still facing economic issues, Argentina is current on all its debt obligations and its population is enjoying relative prosperity.
In order to pay commercial debts, Pakistan needs a large bailout from the IMF as there is no other potential source for this amount of funds. No commercial lenders will service Pakistan unless it has IMF support. China and Saudi Arabia may provide token help but nowhere near enough to tide Pakistan through. And Pakistan must ensure that the scale of the bailout provides breathing room — since the current account deficit is running at over $15 billion per annum, Pakistan needs at least this sum and probably substantially more — a repeat visit in less than a year could destroy confidence. And Pakistan needs to ensure that the US is onside as it has much influence with the IMF, including a blocking vote. We have been given a taste of what this may involve — the US has alluded to full transparency on China’s terms of investment, which many suspect may have been too favourable. However distasteful Prime Minister Khan finds this, he must sidle up to President Trump and Secretary Pompeo to help ensure their support. Pakistan also needs to brace for IMF conditionality. This will involve further currency depreciation, higher interest rates and a reduction in government spending. Such prescriptions have resulted in the Fund being demonised in many emerging markets — and the IMF’s record in providing prescriptions has been less than perfect. But Pakistan’s economy is hugely imbalanced and living on borrowed time — the measures that the IMF will suggest would largely be required anyway. The government needs to collect taxes. Imports need to be heavily reduced. And Pakistan must develop its manufacturing base to export more and substitute imports. It will take time to reverse years of mismanagement and in the meanwhile a huge bridging loan is required.
Prime Minister Khan’s focus should be upon Washington, as our country’s immediate fate will be determined at the IMF headquarters and the White House, not in Riyadh or Beijing.
Published in The Express Tribune, November 17th, 2018.