In the course of its recently concluded Pakistan visit, the International Monetary Fund (IMF) revealed that Pakistan will have to borrow an additional $2 billion on war footing due to a major loophole in the design of the $6.7 billion bailout package.
Sources in the finance ministry told The Express Tribune on Tuesday that the adjustment was made during a revision of the current account deficit forecast, which currently stands at $3.2 billion for the fiscal year 2013-14.
In July this year, the current account deficit – the difference between external payments and receipts – had been projected at $1.3 billion, they added.
The IMF has now projected that the current account deficit will be 1.5% of the Gross Domestic Product (GDP), as compared with the earlier projection of just 0.6% of GDP. The $1.3 billion, or 0.6% of the annual GDP projection, became irrelevant as the limit was reached in just three months of the package’s approval on September 4, casting doubts on the IMF’s working.
The IMF’s projection of the balance of payments came under criticism immediately after the approval of the $6.7 billion assistance under the three-year Extended Fund Facility.
Noted economist Dr Hafiz Pasha termed the IMF’s earlier projections incorrect while arguing that the deficit will remain close to $2.7 billion. The State Bank of Pakistan (SBP) had originally projected a $2.6 billion current account deficit, but had to understate the number under IMF pressure.
Independent economists had argued that initial rosy projections would ease short-term borrowing requirements but bring foreign currency reserves under severe strains when financing requirements will be much more than projections in May and June next year.
In the aftermath of the adjustments, sources said the IMF has now lowered its projections for growth in exports and increased estimates of imports. It has also revised the economic growth projection to 2.8% as against earlier estimate of just 2.5%.
Sources added that the IMF has also slightly lowered the requirements of building gross official foreign currency reserves, which had earlier been fixed at $9.6 billion.
The SBP did not respond to questions of revised current account deficit and lowered reserves requirements.
Filling the gap
To raise the additional $2 billion, Pakistan has assured the IMF that it will look to international markets. It has planned to borrow $500 million from the Overseas Private Investment Corporation (OPIC) in addition to expensive commercial borrowing of another $500 million, ministry of finance officials disclosed.
Islamabad has also told the IMF that it will raise $500 million by floating a Eurobond, and that process for it has already been started. The remaining $500 million requirement will be met by other sources, such as the UK’s Department for International Development (DFID) and the Islamic Development Bank.
However, due to the country’s credibility crisis, serious questions of debt sustainability and the conditions attached with these loans frequently arise. For this reason, there is often a mismatch between the government’s plans and what is eventually disbursed.
According to statistics provided by the Economic Affairs Division, for the current fiscal year, the government had originally planned to receive $5.5 billion in foreign assistance, but only managed $590 million in the first three months.
A senior government official said external accounts will remain under pressure until the $2 billion receipts materialise. The country’s debt burden is also increasing at an alarming rate and with the government’s additional Rs980 billion in its first three months, the total burden adds up to Rs15 trillion. The rupee depreciation has also contributed significantly in increasing the burden.
Published in The Express Tribune, November 13th, 2013.