IMF likely to be next govt’s first stop

Pakistan’s finances are expected to hit the wall in the next six months.

ISLAMABAD: Whoever wins Pakistan’s elections has a fight on their hands - not just against the Taliban, but negotiating with international backers to provide a multi-billion-dollar bailout for a country that has habitually used aid as a crutch to avoid reform.

Unless the International Monetary Fund (IMF) provides another transfusion, Pakistan’s finances could hit the wall in the next six months or so. Talks have already begun.

“If they don’t get an IMF loan and happily muddle along the way things are, they could be facing a default later this year,” said economist Sakib Sherani.

“But it depends on the counter-measures the government will take.”

The loan probably will come through, though the IMF may make the government that wins Saturday’s vote sweat over the conditions attached.



The IMF may stump up around $5 billion, Pakistani officials say, just enough to repay the outstanding debt on an earlier $11-billion package that was suspended in 2011 after economic and reform targets were missed.

The new IMF loan will likely spread repayments over five to 10 years, said Shahid Amjad Chaudhry, financial adviser to the pre-election interim government.

Pakistan requires between $6-$9 billion to avoid a balance of payments crisis, the Asian Development Bank (ADB) said.

“A programme is needed. That is universally recognised by all the parties,” said ADB Country Director Werner Liepach.

For the extra money, Islamabad will have to turn to the ADB, World Bank and other multilateral lenders, along with countries with whom it has compelling foreign policy ties like the United States, China and Saudi Arabia.

Reserves running low

The election is a milestone for democracy. A civilian government has served a full five-year term for the first time after decades of sporadic coups and elections.

The outgoing government, led by the Pakistan Peoples Party (PPP) of President Asif Ali Zardari, has been quietly holding talks with the IMF for a new loan.

The winner of the elections will inherit a rupee currency that has lost almost 40% of its value against the dollar since the last election in 2008, and a fiscal deficit that the ADB thinks will balloon to nearly 8% of gross domestic product compared with 5.3% two years ago.

Official reserves held by the State Bank of Pakistan have slumped to $6.7 billion, down from around $12 billion a year ago, providing cover for just five weeks of imports.

Debt repayments have depleted reserves, but central bank’s intervention to stop the rupee weakening beyond 100 per dollar has also played a part. The IMF estimates State Bank has spent an average of $250 million a month since last October to prop up the rupee.

State Bank spelt out its worries in a policy statement last month that noted a cumulative net capital and financial inflow of $34 million during the first eight months of the fiscal year 2012-13 was insufficient to finance a current account deficit of $700 million for the same period.

Rich won’t pay

Pakistan has been a regular client of the IMF since the 1970s. It has entered nearly a dozen loan programmes since 1988, but only successfully completed a handful.

The IMF wants Pakistan to reduce its fiscal deficit by cutting energy subsidies that consume 2% of GDP per year and mainly benefit the wealthy elite.

Pakistan sells its power for Rs9 per unit. They cost Rs12 to produce. The problem is worsened by “line losses”, often a euphemism for influential people refusing to pay bills, that account for around a fifth of total power generated.

“Reform is not even on the table,” said a visibly frustrated Nadeemul Haque. He was the deputy chairman of the government-run Planning Commission, which oversees policy and major projects, until he was fired last week for criticising the government.

Pakistan needs to generate three million jobs a year to absorb its growing population. Instead, said Haque, it has been losing about one million annually, mostly due to the power crisis.

Pitifully weak tax collection is another cause of the gaping hole in Pakistan’s finances.

The IMF wants Pakistan to broaden its tax base, yet under the PPP government tax compliance fell to a point where only around 0.5% of Pakistanis paid income tax.

Some reforms may be beyond government control. Would-be investors are frightened by erratic intervention in contracts by activist judges, said ADB’s Liepach, citing several examples of multi-million dollar deals gone awry.

“Investors want stable policies and a predictable legal framework,” he said. “They don’t have either.”

While Pakistan’s politicians repeatedly demonstrate a lack of commitment to economic reform, frustrated donors also lack leverage to force change. They seem resigned to providing just enough cash to let Pakistan lurch from one crisis to the next.

“There’s a mentality here that (donors) are just going to let Pakistan muddle through, that they (Pakistan) will get the cash anyway,” said an international financial analyst.

Published in The Express Tribune, May 10^th, 2013.

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