Parting ways with the IMF: The govt’s math does not add up

Published: October 3, 2011
OFF BY A LOT: 850b rupees is what the government says its budget  deficit will be 1,381b rupees is what the deficit is far more likely to be, if one does not believe the government’s faulty assumptions. DESIGN: ANAM HALEEM

OFF BY A LOT: 850b rupees is what the government says its budget deficit will be 1,381b rupees is what the deficit is far more likely to be, if one does not believe the government’s faulty assumptions. DESIGN: ANAM HALEEM


Pakistan’s eccentric decision to damage its relations with the International Monetary Fund has resulted in the suspension of development loans from other multilateral financial institutions – a consequence that is likely to have both short and long-term repercussions for the economy.

The Asian Development Bank – a Manila-based lending agency that has a history of extending loans to Pakistan in times when Western-dominated institutions had refused to help out the country – was the first to say that it would not give lend any more money to Islamabad unless it receives the IMF’s Letter of Assessment, a certificate of the soundness of a country’s economic indicators and of progress on promised reforms.

The Washington-based World Bank has not yet publicaly announced its intentions, but there is little doubt that it will join the ADB’s bandwagon.

For their part, the country’s economic managers seem to think that the country can continue to make do without external budgetary support.

Finance Minister Abdul Hafeez Shaikh has claimed that, not only will Pakistan be able to meet all of its debt repayment obligations in 2012, but it will also be able to do so while maintaining foreign exchange reserves above $16 billion. The arithmetic of this claim, however, does not quite add up.

Assumptions versus reality

According to the finance ministry’s economic affairs division, despite the suspension of the programme loans, Pakistan will receive gross inflows of $3.8 billion.

However, these numbers include an assumption that the government will be able to raise $500 million from auction of exchangeable bonds backed by shares in the state-owned Oil and Gas Development Corporation. The government estimates it will get another $500 million from the Islamic Development Bank while the remaining $2.8 billion is likely to come from multilateral institutions for the funding of projects.

Given the volatility in international debt markets due to the European sovereign debt crisis, however, Pakistan may not be able to complete the OGDC bond offering, or else be forced to pay an exorbitant interest rate, an action which most capital markets experts consider bad financial planning.

As for the project loans, international financial institutions have said they are more than willing to fast-track the disbursement of those loans – provided Islamabad undertakes measures it has been promising for decades, including setting up project management units, addressing land settlement and environmental concerns as well as introducing greater transparency in the bidding process for contractors.

The challenge for the federal government, however, will be to get the notoriously slow-moving provincial governments to move forward with these requirements, since most of the time, the provinces are the executing agencies for the project loans.

A failure to address these concerns costs the government money: financial institutions charge the government even for loans that have not been utilised. In addition, the government will still have to arrange for some local financing, since the international institutions only provide their funding at the completion of the project. The higher local borrowing costs are likely to add to the deficit.

Repayment assumptions

The government estimates that it needs to pay back $3.3 billion in principal and about another $900 million in interest on its foreign debt, including $1.4 million in repayments to the IMF.

The government seems to feel it can continue to do this, though it is counting on the continued high international commodity prices that have fuelled an export boom, as well as a continuation of record-high $11 billion in expatriate remittances and $2 billion in foreign direct investment.

Officials say they expect these three factors to help keep the economy stable, though they seem to overlook the fact that the rest of the world – including most of Pakistan’s major trading partners – are going through a recession.

The government is also underestimating the risk of capital flight, which experts say has already begun. The State Bank of Pakistan already had to pump in about $130 million into the foreign currency markets last week to help stabilise the sharply dropping rupee, bringing foreign exchange reserves down to $17.3 billion.

Yet most experts agree that the pressure on the rupee is only likely to increase till March 2012, when the government must begin repaying the IMF.

Implications for the budget and the economy

The government is highly unlikely to meet its already optimistic target of a budget deficit equalling Rs850 billion, or about 4% of the total size of the economy.

Among its other faulty assumptions are receiving about Rs75 billion by auctioning 3G licences to mobile telecommunications companies, despite not having settle a claim from Etisalat, the UAE-based buyer of Pakistan Telecommunications Company, that the government would not do so until 2013. The Rs70 billion that Etisalat owes the government for its purchase of PTCL are also unlikely to be paid this year.

In addition, the government is unlikely to receive much of the Rs118 billion owed to it by the United States under its Coalition Support Fund programme, due to strained ties between Islamabad and Washington.

All these factors come to 1.3% of GDP, taking the budget deficit to 5.3%.

In addition, the government has been delaying power sector reforms that are adding between Rs22.5 billion to Rs30 billion per month to the deficit.

The government also wants to pick commodity financing overdue subsidies this year, adding another Rs120 billion.

All of these will take the deficit to around 6.5% of GDP or Rs1,381 billion.

During the last fiscal year ending June 30, 2011, the budget deficit was 6.6% of GDP or Rs1,314 billion. Out of that, Rs1m206 billion were raised from the domestic market.

In absence of external financing, the government will have to borrow this entire amount either from domestic sources or print more money. This will not only take away private sector credit but also result in double-digit inflation for the fourth consecutive year.

Published in The Express Tribune, October 3rd, 2011.

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Reader Comments (19)

  • ayesha
    Oct 3, 2011 - 1:56AM

    The government’s math is quite accurate. It is geared towards Senate elections in March not towards Pakistan’s economy.


  • H.A. Khan
    Oct 3, 2011 - 7:48AM

    It is all about being in power and enjoying what comes with it.Petrol prices was increased by Rs 4….did any political party protest?.

    The problem in Pakistan is all political parties have stake in power…be it at federal level or provincial level. Press does post facto reporting. Can you show me three articles that have been researched about how much actual power RPP are generating since past three months and how much is being paid. The economic figures are fudged by the government and State Bank will allow printing of notes. We still have acting governor of State Bank. FBR gives the figures of tax collection which again are not reliable.They hold back refunds.
    Yes, the maths does not add up and the real mess will strat after March 2012 when loan re-payment to IMF will start.


  • Khalid Ahmed
    Oct 3, 2011 - 10:58AM


    Exactly. Election is the reason the government abandoned IMF deal as the government doesn’t need someone constantly looking over its expenses during election campaign. The government will come up with more subsidies and bonuses for people in the coming days which will only worsen the economic situation.


  • Abdulaleem
    Oct 3, 2011 - 11:18AM

    With friends like these, who need enemies…


  • Oct 3, 2011 - 1:17PM

    Name one country where IMF reforms worked in long-run? IMF is based on Washington consensus.

    Washington Consensus — the dismal litany of deregulation, privatization, unhindered flight capital and hot money flows, the primacy of speculation over production and of finance over economics, the abolition of the state sector, measures against labor, and the general race to the bottom. Worldwide, about 1 billion people live in hunger and under the threat of starvation ­ perhaps the most eloquent proof that 20 years of economic globalization have been a failure.


  • Hatim
    Oct 3, 2011 - 2:54PM

    ET should first fix its grammar before it critisizes the government’s arithmetic. I had to read this sentence thrice before I understood what the author really meant:

    Yet most experts agree that the pressure on the rupee is only likely to increase till March 2012, when the government must begin repaying the IMF.

    That sentence conveys that after March 2012, there will be lesser pressure on the Rupee. However, the author is trying to say that the pressure will will only increase and not decrease…


  • meekal ahmed
    Oct 3, 2011 - 3:10PM


    Here we go with the usual rant. Please tell me Mr Moise just ONE part of the Washington Consensus that Pakistan has implemented?!
    Privatization? Abolishment of the state sector? Measures against labor?

    We need to get over it. Call it what you want (Washington, Chinese or Voodoo Consensus) but we need growth-enhacing structural reforms.

    Mr Rana. good article. Finaning gaps have to be filled ex-post and it is likely they will be filled by domestic borrowing.


  • Khalid Ahmed
    Oct 3, 2011 - 3:38PM


    If you keep track of UN’s Millennium Development Goals (MDG), most developing countries are well on course of reaching MDG targets before 2015. So globalization is not a failure. Also 20 years is too early to call an economic system a failure.

    And how is Washington Consesus bad? Isn’t most economists even within Pakistan are of the opinion that Pakistan should carry out more privatization, more liberalization, and banking reforms which all fall under Washington Consensus?


  • Ali
    Oct 3, 2011 - 5:33PM

    I am going to mention something here that does not particularly pertain to this article but Express tribune in general. With time, the writing quality of your articles has deteriorated. As common with other newspapers, the articles seem to have been written in a hurry. Therefore, I’d request you people to proof-read the piece because frankly it is really irritating!

    “….was the first to say that it would not give lend any more money to Islamabad unless it receives the IMF’s Letter of Assessment, a certificate of the ….”

    “…..the country’s economic managers seem to think that the country can continue to make do without external budgetary support.”


  • meekal ahmed
    Oct 3, 2011 - 10:46PM


    “make do” is fine; nothing wrong with that. Maybe you need to check your Englilsh.


  • meekal ahmed
    Oct 3, 2011 - 10:53PM

    @Khalid Ahmed:
    Privatization, yes. It is better to sell the loss-making and hopelessly corrupt and inefficient public sector enterprises (starting with PIA) even for Rs ONE.

    More liberalization, no. The economy is liberalized and price signals work in most product and factor markets. The economy is also quite open. We have no restrictions on the current account and only some on the capital account. Money can flow in and out freely but not if your macroeconomic policies are flawed. Then money will only flow out.

    We have had a good deal of banking reforms and this is one sector where privatization has worked well. Banks are extremely profitable and make a significant contribution to taxes. However, spreads are excessive and penalize savers.


  • Oct 4, 2011 - 7:47AM

    @meekal ahmed:
    PTCL remember?


  • Oct 4, 2011 - 8:32AM

    @meekal ahmed:

    Which reforms? Who elected IMF to run our businesses and policies?

    You still fail to mention single country which fared well to IMF policies. Refrain from dogma and keep things real. We don’t want to be another Yugoslavia.


  • Oct 4, 2011 - 8:33AM

    @Khalid Ahmed:
    Name the country? Libya did very good without IMF now it is being bombed. IMF is the Imperialism new clothes.


  • Sahar
    Oct 4, 2011 - 5:56PM

    IMF does not come to Pakistan begging for it to take a loan. When Pakistan cannot handle its finances it goes to the IMF for a loan. You guys make it sound like IMF is the one whose forcing Pakistan to take money from it. And yes i am Pakistani! Let me tell you something, the IMF programme that we (Pakistan) were in was home grown, which means Pakistan came up with the conditions. and fiscal reforms are MUCH needed otherwise u and i will be paying for it, which in many ways we already are.


  • Oct 4, 2011 - 7:56PM

    It is because the Finance minister is from either world bank or some other global clique of bank (Citibank, IFC, IMF). Select a mercantilist finance minister then see how many option are there beside suicidal IMF policies otherwise the employee on temporary lease to Pakistan finance ministry will always be loyal to it’s original employers.


  • CJ is Corrupted, People are Brain-Dead
    Oct 5, 2011 - 4:34AM

    Read my name loudly twice and clap once. Magic!


  • Sahar
    Oct 5, 2011 - 10:38AM

    wow thats some conspiracy theory! loyal to original employers??!!…when shaukat tarin took over, he didnt have any choice. it wasnt his decision to turn to the imf but he had no other choice bc of the state the economy was in and that wasnt his doing! there were no options at that point. what would you have done?


  • Oct 6, 2011 - 7:31AM


    He served in the 1990s as country head of the World Bank’s operations in Saudi Arabia and was senior official advising 21 countries in Asia, Africa, Europe and Latin America. He was Minister for Finance, Planning and Development, Sindh province, 2000-2002.[2] He served as Privatization Minister in former president Pervez Musharraf’s military-led government[3] for three years.[2]
    Hafeez Shaikh has been a partner at New Silk Route, an international private equity firm.[3] Current NSR partners include Parag Saxena (General Partner and CEO), Rajat Gupta (General Partner and Chairman), and Victor Menezes (senior advisor; retired from Citigroup).[4] The fund made an investment in Nectar Lifesciences in 2010.[5]


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