Pakistan needs to get out of this debt dependency trap: minister

ISLAMABAD: From cutting power subsidies to forcing currency devaluations that stoke inflation, the hard choices facing Pakistan as it seeks a bailout from the International Monetary Fund (IMF) pose a real challenge to Prime Minister Imran Khan.

Khan was elected in July with the support of many Pakistanis seeking a change in the country of 208 million people.

Creating 10 million jobs would require the economy to grow at 8 percent but that can only be achieved with economic shock therapy that in the short term will smother growth to far below the 5.8 percent achieved in the year to June, economists say.

“We really have to get out of this debt dependency trap,” Muhammad Hammad Azhar, Pakistan’s state minister for revenue, told Reuters.

He said the government was considering the possible restructuring of some foreign loans but did not give details.

Khan’s government blames many of Pakistan’s current economic woes on the previous administration’s “strong rupee” policy, which rendered Pakistan’s exports uncompetitive. The central bank also burnt through currency reserves defending the rupee.

Reserves have plummeted 41 percent this year to stand at $8.3 billion, or about 1.6 months of import cover, despite China lending billions of dollars to Islamabad to prop up the currency.

On Wednesday, Khan blamed the previous government for the economic mess and urged Pakistanis to remain calm.

“I want to tell all of you to stay strong and not to panic. This is a very short period of time which will go away.”

China loans

China has made Pakistan a flagship country in its vast Belt and Road infrastructure building program, pledging about $60 billion in financing for ports, railways and roads. But rising debt levels have caused Islamabad to cut the size of the biggest Belt and Road project by about $2 billion.

U.S. Secretary of State Mike Pompeo has said there would be “no rationale” for an IMF bailout of Pakistan that pays off Chinese loans.

Khan’s administration had also approached China and Saudi Arabia, Islamabad’s other historical ally, for help to prop up the economy but they appear to have balked at coming to Pakistan’s rescue on their own.

Though the size of any bailout is not clear, Khan this week suggested Pakistan needs $10-12 billion. On top of the IMF, the World Bank and the Asian Development Bank are expected to lend money, as they did in 2013. China and Saudi Arabia may also contribute.

The IMF last week commended Pakistan for curbing gas and electricity subsidies, raising interest rates and devaluing the currency. But it warned that Islamabad needs to go even further in all those areas.