Can Pakistan avoid another IMF bailout?

  • An inevitability in 2018?

The swelling current account deficit, amongst many economic factors, is one of the primary reasons why there has been speculation about the nation seeking an IMF bailout. As the impact of the deficit is being witnessed on depleting foreign exchange reserves and lacklustre performance of the Pakistan Stock Exchange, there are talks about the country taking other steps like devaluation of the rupee before they initiate talks at the IMF level for a bailout.

Currency devaluation is the route to take if the growing current account deficit is to be contained. IMF itself estimated that the rupee was overvalued by as much as 20pc before the recent decline in rupee value which took place late last week.

The word is that the current account deficit could amount to as much as $16-16.5 billion for FY2017-2018. Add to that the $7-7.5 billion needed for debt servicing, and Pakistan could be negotiating a bailout package by as early as March-April 2018.

Taking into account latest statistics, the economists concerns don’t seem to be blown out of proportion.

Currency devaluation is the route to take if the growing current account deficit is to be contained. IMF itself estimated that the rupee was overvalued by as much as 20pc before the recent decline in rupee value which took place late last week

Pakistan’s current account deficit witnessed a 122pc increase between July-October 2017 as the figure came in at $5.01 billion. In the month of October 2017, the current account deficit was reported at $1.31 billion.

These numbers are significantly higher than what was reported during the previous fiscal year.

Leading political parties, such as PTI, also fear that the country would have to resort to external financing from international creditors to curb the economic problems being faced by the nation.

Speaking to the press in early September 2017, Asad Umar, PTI member of the National Assembly Standing Committee on Finance said that, “It is almost confirmed now that the country will need another bailout package from international creditors by next year.”

He also expressed his concerns about the IMF not being accommodating towards Pakistan in the near future, and that PTI support for a bailout would depend entirely upon the terms and conditions of agreement between the nation and the IMF.

Other than the IMF, Asad Umar spoke about China’s role in the bailout, adding their name to the list of possible creditors to the nation. This assumption wouldn’t be wrong if we consider how China has come to our rescue with $900 million in 2016 and $300 million in the first three months if 2017 to help us in overcoming our currency crisis.

So the question is, why are we waiting till 2018 to negotiate a bailout package with the IMF? It was only last year that the nation was able to clear out the debt it had taken from IMF in 2013.

Some suggest Pakistan should have begun negotiations for a bailout package as early as January of this year. However, the upcoming elections seem to be holding back these talks.

member of the PML-N spoke to the Financial Times and said that talks with the IMF are being delayed in efforts to limit any sort of political fallout since bailouts are politically volatile issues in the country, and striking another deal with the IMF could go the wrong way for the ruling party in the upcoming elections.

What should we expect as Pakistan knocks at IMF’s door this time around?

Former finance minister Hafeez Pasha anticipates the imposition of ‘non-economic’ conditions as the IMF could possibly as the nation to cut back on the China-Pakistan Economic Corridor. He has cautioned that Pakistan could run out of foreign exchange by September next year.

He had also criticised the government for its policies aimed at bringing economic stability and the ‘holding operation’ that will allow foreign currency reserves to be kept at a level that could allow the crisis to be deferred till June next year.

However, despite all the indicators pointing in the direction of a bailout package becoming necessary, the ruling party claims to be making every effort possible to avert the negotiation and need for a new program with IMF.

In recent talks with IMF, officials clearly stated that the nation would not be looking for a new bailout package during what is left of PML-N’s rule over Pakistan. Instead, the focus will be on fiscal consolidation and controlling the current account deficit to contain the mounting issue.

It was confirmed after the Post Programme Monitoring (PPM) held on Thursday that no request for a bailout was put forward by Islamabad. Prime Minister Shahid Khaqan Abbasi assured that the fiscal deficit will not be allowed to extend beyond 5.8pc of GDP while the twin deficits will be monitored and maintained at ‘manageable levels’.

The IMF chief has however commented on erosion of the fiscal and external gains by Pakistan and that the country will need to look at structural reforms. Moreover, the chief added that, “The electioneering year should not be made an excuse as some preparatory work is required before launching long term reforms.”

Are things looking to get easier for Pakistan, and can the country withstand the current crisis without a bailout package?

Ultimately, it seems as though Pakistan and its officials will have to make a decision between introducing extremely aggressive structural reforms or putting in a request for a new bailout package from international creditors.

None of these options is easy, but a decision has to be made. We can expect the request for a new bailout package, even if it becomes direly necessary, to be put off till the elections take place, but nonetheless it could become an inevitable reality in 2018.