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US red alert to IMF

US secretary of State Mike Pompeo has issued a red alert to the International Monetary Fund against fresh bail out Package to Pakistan which it badly needs to pay off its external liabilities on account of swollen current account deficit and ballooning foreign debt. He warned on Monday that IMF loans can not be used by the Pakistan Tehrik-i-Insaf led upcoming government for retiring Chinese debt acquired by the pervious Washington favourite PML-N government.

In an interview with CNBC, Pompeo said that US looks forward to engagement with the new government of Pakistan that Imran Khan is expected to form but hastened to say that there is no “rationale” for bail out that pays off Chinese loans to Pakistan. “Make no mistake. We will be watching what IMF does.”Pompeo said. “There is no rationale for IMF tax dollars, and associated with that of American dollars which are part of IMF funding for those to go to bail out Chinese bonds holders or China itself,” Pompeo said. In other words, foreign capital inflow from this international lending agency could not be used to pay off short term Chinese loans.

The United States enjoys 70 percent voting rights and granting loan package to Pakistan will not be an easy task by the IMF. If at all the lending agency does approve the bail out that would be tied to very tough conditions. It will compel the next government to take a number of politically unpopular decisions. The PPP and PML-N governments agreed to certain conditions while seeking IMF loan programmes but backed out after availing the loan facility from imposing direct taxes on wealthy people and privatisation of public sector corporations both profitable and losses incurring.

The ministry of finance, the IMF, and independent economists has assessed Pakistan, gross external financing needs for the current fiscal year to fall in the range of $ 23 billion to $ 28 billion. As usual finance ministry estimates of roughly $ 23 billion financing needs are at the lowest end. The IMF has assessed them to be $ 27 billion and the independent economists’ calculations have 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 return $ 1 billion sovereign bonds. “There will still remain a gap of $ 10 to 14 billion after accounting for all possible inflows,” said Dr. Hafeez Pasha. The size of financing gap would affect borrowing cost.

Pakistan has a special drawing rights 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 voting power. In 2013, the IMF approved a loan package Extended Fund Facility (EFF) of 6.2 billion which was 425 percent of the allocated quota. In 2008, it had approved bail out package of $ 11.3 billion for Pakistan equal 700 percent of the 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.

Approval of IMF programme is inevitable because it paves the way for seeking financial assistance from other international donor agencies. If the country manages to get IMF programme, the Asian Development Bank and World Bank can also restore the suspended budgetary support to Pakistan. Why the IMF was more generous towards PPP and PML- N governments because the people believe that they were installed by the international establishment whereas the upcoming government has been solely elected by the people particularly the youth. This explains the red alert issued by the US Secretary of State to IMF.

 

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