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Tackling economic crisis

The technocrat law maker Asad Umar, who has been tipped to lead the finance ministry, minced no words about the economic mess created by the two previous governments due their bad governance, mismanagement and rampant corruption. He said no option including knocking on the doors of International Monetary Fund (IMF) will be ruled out to steer the country out of severe economic crisis.

The PTI government will have to successfully tackle the macro economic imbalances of alarming current account deficit, debt servicing of ballooned external debt, reducing massive budget deficit and revival of both agriculture and manufacturing sectors.

Pakistan faces mammoth task of arranging $ 11billion to fill the financing gap in the ongoing year, according to assessment of finance ministry. This estimation of external financing requirements is much below the projections of IMF and independent economists. However, this conservative estimate is higher than the gross official currency reserves that currently stand at $ 9 billion. Experts have predicted that IMF, s financing alone cannot fill the gap. The actual external financing requirements are much higher which reflects the gravity of challenge the PTI government would face in its first year in power.

Seeking IMF bail out package will not be an easy task as the lending agency may not give this time any latitude for deferring the tough conditions it will impose, which will be politically unpopular decisions with expected public backlash. The PPP and PML-N government agreed to meet tough conditions, while seeking IMF programmes but had to back out after availing the loan facility. One major condition will be privitisation of public sector corporations both profitable and loss incurring.

After the PML-N took reigns of the country in June 2013 losses of state owned units continued to mount with an accelerated speed. They increased to Rs. 495 billion in the fiscal 2013-14, Rs. 570 billion in 2014-15, Rs.712 billion in 2015-16; Rs.862 billion in 2016-17, and crossed the trillion mark in 2017-18, reaching to Rs. 1.109 trillion. The public sector enterprises were allowed to hemorrhage because the government wanted to sell them at throw away price to its cronies. One such futile attempt was made by a former Prime Minster Shaukat Aziz to sell Pakistan Steel Mill for peanut amount of 270 million dollars in 2006 when it was making sufficient profit. It is because of his government shady deal with Itesalat Company for PTCL privatisation that the company has refused to pay the remaining amount of $ 800 million to Pakistan. The payment has been outstanding for the last 10 years.

The ministry of finance, the IMF and independent economists have assessed Pakistan’s’ gross external financing needs for the current fiscal year to fall in the range of $ 23 billion to $ 28 billion. As usual finance ministry’s estimates of roughly $ 23 billion financing needs are at the lowest end. The IMF has assessed them to be $ 27 billion and independent economist’s calculation has raised their ceiling to $ 28 billion.

Pakistan can book a current account deficit of $ 18 billion in FY 19, while it would need $ 9.5 billion to $ 10 billion for external debt servicing, said Dr. Hafeez Pasha, adding that in this fiscal year it will repay $ 500 million to IMF and also return $ 1 billion sovereign bonds. “There will still remain an external financing gap of $ 10 to $ 14 billion after accounting for all possible inflows,” said Dr. Hafeez Pasha.

The size of financing gap would affect the cost of borrowing. Pakistan has a special drawing rights (SDR) quota of $ 2 billion in IMF, which is roughly equal to $ 2.8 billion. The SDR quota is based on the size of the economy of member country and its voting power. In 2013, the IMF approved Extended Fund Facility (EFF) of $ 6.2 billion which was 425 percent of the allocated quota. In 2008, the IMF had approved a bail out package of $ 11.3 billion for Pakistan equal to 700 percent of its allocated quota. At present, Pakistan owes $ 4.2 billion which means the country has exhausted about 150 percent of its quota. This could further reduce the size of IMF package.

If the country manages to get IMF programme, the Asian Development Bank and the World Bank can also restore the suspended budgetary support to Pakistan. These two lenders require IMF letter of comfort before restoring the budgetary support. The road map of the incoming government envisages fiscal and monetary incentives to farmers, industrialists and exporters to enhance the productive capacity of the economy and exploit the entire exports potential of the country. Release of exports rebate which was withheld by the previous government and significant reduction in tariffs of energy and agricultural inputs are the viable options to be exercised for revival and turnaround of the economy.

 

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