Guarantees for foreign suppliers

It is not very often that one gets a concrete, dollars-and-cents example of how much the government’s incompetence at managing its finances costs the economy, but we may finally have one on our hands. Some exporters based in the United States and Europe have begun questioning the ability of their Pakistani customers to make payments for their imports and have begun charging higher fees from them in order to get stronger bank guarantees on their letters of credit.

In simpler terms, people are beginning to think that Pakistan is about to run out of foreign exchange reserves and so they are charging us more money for the risk of doing business with us. These people are probably not very encouraged to hear the prime minister-elect’s adviser on finance Sartaj Aziz talk about how Pakistan does not want to rush into a bailout programme with the International Monetary Fund (IMF), as though the country can afford the luxury. IMF programmes are painful, but they only force the government to do what it should have done by itself ages ago, which is to ensure that it does not make any promises it cannot deliver on. One of the biggest of those promises — implied in the government’s conduct — is that electricity in Pakistan will be cheap and free to be stolen by those with the power to do so. Another is that the government can hire an absurdly large number of people in companies that it has no business owning in the first place.

Taken together, energy subsidies and bailouts of state-owned enterprises account for well over two-thirds of the budget deficit. That budget deficit is what causes Pakistan to have to borrow from global lenders like the IMF. And repayments of those loans inevitably place a strain on the country’s foreign exchange reserves. The government needs to get its house in order, before there is a sharp drop in the value of the rupee. That means undertaking painful measures, like going to the IMF. It will not be easy, but it needs to be done.

Published in The Express Tribune, May 26^th, 2013.