IMF bailout versus debt sustainability
Contrary to the government’s version of successful negotiations with the International Monetary Fund (IMF), media reports reveal that agreement on bailout package may hit snags on the condition of sharing all the details of Chimes loans obtained under CPEC framework and short term exorbitantly high interest bearing commercial loans. The conditions of the Washington based lending agency include sharing of full details of Chinese loans, hiking power and gas tariffs, flexible exchange rate, withdrawal of tax concessions granted under SROs by the previous government and imposition of new taxes.
The issue of Chinese loans has been raised on the premise of debt sustainability capacity of Pakistan’s economy as debt to GDP ratio has gone up to 84 percent as compared with the sustainable limit of 60 percent envisaged in Fiscal Responsibility and Debt Limitation Act 2005. The international donor agencies have repeatedly advised the previous government to avoid reckless borrowing for the least productive or losses incurring development projects like motorways, metro-bus and Lahore Orange Train. Like wise, the government was cautioned to reduce the imports of luxury goods for the payment which loans were raised in the European market through Euro Bond and Sukuk bonds. These loans were used to pay for imports from China. The trade deficit with China stand at $ 9 billion plus. Moreover, the World Bank pegged a loan facility of $ 400 million in 2016 subject to the condition of removing certain lacunae in the Fiscal Responsibility and Debt limitation Act. The previous PML-N government did not concede the condition and the soft loan was not disbursed.
In sharp contrast to the opinion of independent economists that the US enjoy the clout of 70 percent voting rights in the IMF, Finance Minister Asad Umer is of the view that Washington has 16.5 percent voting rights and he would be able to clinch a deal with the donor agency on the basis of his current negotiations and will get the support of 51 percent vote in the Board of Directors meeting. This argument may not come true if Japan and Western powers are influenced by the United States. Last year US President Donald Trump and Secretary of State Mike Pompeo had categorically said that IMF loans contain American taxpayers’ dollars and cannot be used by Pakistan to pay Chinese debt. The US President had cautioned, “We would be watching what IMF does.”A few days ago three US Congressmen wrote a letter to the treasury Secretary Steven Munchin and Secretary of State Mike Pompeo opposing IMF bailout package for Pakistan. In the prevailing scenario, the only ray of hope for agreement with the lending agency for bail out is that the US may soften its attitude in view of Pakistan’s facilitation role to arrive at a political settlement of Afghanistan.