News ID: 217990
Published: 0749 GMT July 09, 2018

IMF bailout on the cards for Pakistan’s next government

IMF bailout on the cards for Pakistan’s next government
AFP

Pakistan’s next government, to be chosen in a July 25 election, faces growing fears of a balance of payments crisis with speculation it will have to seek its second IMF bailout in five years, analysts said.

The central bank is running down its foreign reserves and devaluing the currency in a bid to bridge a yawning trade deficit, and the winners of the July 25 election will have ‘limited time’ to act, Fitch ratings agency said on July 2, according to AFP.

Together, the economic challenges are ‘horrendous’, said Ashfaque Hasan Khan, an analyst and former financial adviser to the Pakistan government.

“The most important (challenge) will be how to protect Pakistan’s balance of payments, how to build Pakistan’s foreign exchange reserves and how to fix its fiscal position,” he told AFP.

Pakistan — a rapidly growing country of some 207 million people — has been battling to get its shaky economy back on track and end a years-long chronic energy crisis that has crippled industry.

Confidence had grown slightly in recent years, with security improving and the IMF claiming in October last year that the country had emerged from crisis after completing its post-2013 bailout program.

The previous government of former prime minister Nawaz Sharif attempted to ease the power shortages, enact structural reforms and improve the creaky infrastructure which had hampered growth.

China has also made progress on an ambitious multi-billion dollar infrastructure project — the China-Pakistan Economic Corridor (CPEC) — linking its western province of Xinjiang to the Arabian Sea via Pakistan.

But growth has not been as fast as many hoped. The economy grew by 5.8 percent during 2017-18, its fastest since 2005 but still missing a government target by 0.2 percent.

Public debt now sits at roughly 70 percent of GDP.

And the deficit is widening. Pakistan, which has historically relied on imports, has increased its procurement of materials to help build CPEC projects while also suffering from higher oil prices.

Its meagre exports such as textiles, meanwhile, have been hit as cheaper Chinese-produced goods flood the markets. Foreign remittances have not been enough to plug the gap.

Amid stability fears the caretaker government pledged in June to stem the current account deficit with rapidly dwindling foreign reserves.

According to the State Bank of Pakistan, the country’s reserves plunged to $9.6 billion on June 22 from $16 billion on April 17.

“We have to finance this gap of the trade deficit of $25 billion by depleting our reserves. There is no other option,” caretaker Finance Minister Shamshad Akhtar, installed last month, told a press conference.

“This is a major worry which our government is facing.”

The announcement came hours after the central bank devalued the rupee by 3.7 percent, the third devaluation since December and representing a cumulative 13 percent against the US dollar, according to Fitch.

The agency said the move has eased some pressure on reserves — but “their magnitude so far has not been sufficient to prevent external finances deteriorating more sharply than we expected.”

Economic analyst Dr. Salman Shah told AFP that Islamabad would have to seek help from friendly countries or negotiate a fresh bail-out package from the IMF.

“It would be very tough for the next government to deal with all those challenges, it would have to undertake wide-ranging and deep-rooted reforms in all sectors linked to the economy,” he said.

But Shah, also a former economic adviser to the government, said that though the task was huge projects such as CPEC meant there was hope long-term.

 

   
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