Lender of the last resort
To devise a viable mechanism for lessening the burden of economic mess created by the previous PML-N government and provide a temporary easy sailing to the next government, the caretaker government has to kick-start the process of availing the much needed financial bail out from the International Monetary Fund (IMF). It had become a necessary evil to commit because of the alarming debt level and depletion of foreign exchange reserves to the lowest ebb. It will certainly enable the incoming government to go along quicker if it chooses to exercise the option.
Very few people will disagree that Pakistan needs another IMF bail out as foreign exchange reserves have depleted to less than two month of import cover even after three time rupee devaluation. The flood gates opened by the previous government for non-essential imports from China under one sided traffic nature FTA phase –I with zero duty on 35 percent import tariff lines and PTAs with Indonesia and Turkey swelled the current account deficit to $ 37 billion plus. The previous government had to put on hold FTA phase-II with China envisaging concessions on 75 percent import tariff lines because of tough resistance of trade bodies, which were strongly supported by the opposition party Pakistan Tehrik-e- Insaf.
The FTA phase-I led to the closure a large number of domestic industries further depressing the export potential of the economy. With exports not picking pace, a widening current account deficit has taken a big toll on the economy which faces several near term challenges. It is in this backdrop that the economist of outstanding caliber, caretaker finance minister Dr. Shamshad Akhtar, while addressing media at Pakistan Stock Exchange on Saturday said the groundwork for IMF programme is being put in place. Final decision in regard to avail or not the IMF bail out for getting fiscal space has been left to the next elected government. It is a wise policy decision that is left to the discretion of incoming government though an eminent economist Dr. Shahid Hassan Siddique had stressed that IMF option should have been immediately exercised by the caretaker government. Given the myopia and blame game hobby of political elite it is good that caretaker government has confined itself to the groundwork of next IMF programme.
Dr. Shamshad Akhtar emphasized that building of foreign exchange reserves is an immediate and most critical priority of the government. She expressed concern that a massive import bill and repayment to foreign creditors have eroded foreign exchange reserves that dropped below $ 9.5 billion at the start of this month.
The finance minister suggested that a change in approach is needed to maintain the reserves at stable level. “We should plan for six months import cover,” She proposed, adding that the trend indicates that current account deficit would hit a record of $ 18 billion or 5.8 percent of Gross Domestic Product (GDP) in fiscal year that ended on June 30, 2018. Similarly, the budget deficit has exceeded the set target of 4.1 percent of GDP to 6.8 percent in FY 18. The fiscal deficit has exceeded the target by 2.7 percent due to shortfall of Rs.679 in revenue collection. “Total shortfall of Rs. 247 billion relative to the original budget would have been steeper without the tax amnesty scheme which contributed Rs. 89 billion,” She said. The finance minister disclosed that tax-to-GDP ratio has increased to 12.8 percent compared to 11.2 percent of prior fiscal year, but needed to be doubled as soon possible.
The top international credit rating agencies Moody’s and Fitch have downgraded the economic outlook of Pakistan from stable to B-3 negative. It remains to be seen how tough the conditions of IMF will be for the next bailout programme.