Pakistan's Economic Crisis About To End?

Though the incumbent finance minister has claimed that by receiving commitment from the UAE for extending a loan of $1 billion Pakistan has come very close to clinching the staff-level agreement with the IMF.

It is widely believed that the Pakistani economic policy makers are not really cognisant of the width of $350 billion Pakistani economy that is now struggling to cope up with the mounting structural issues.

Pakistani economy however has fallen so badly that the assistance-fatigue was clearly manifest as in the last few years China, Saudi Arabia and UAE have already placed $9 billion deposits with Pakistan’s central bank and this amount was quickly consumed and Pakistan is now seeking rollovers every year.

This situation is indicative of the fact that international lenders are getting tougher by the day as was evident by the IMF having asked Pakistan to arrange $6 billion in fresh loans including $3 billion to be raised before reaching a staff-level agreement. Reportedly it is still not clear whether the IMF has withdrawn its condition for Pakistan to arrange $2 billion from a bilateral source and the remaining $1 billion from either commercial banks or other multilateral institutions.

Pakistan has already assured the IMF that it would no longer implement the petrol subsidy scheme that was reported to be the main stumbling block for getting the agreement signed.

It is widely acknowledged that the IMF has taken inordinately long time to finalise even its preliminary agreement with the country and it is since early February that Pakistan has been negotiating with the IMF for revival of its programme.

This attitude is exhibited despite Pakistan emphatically requesting the IMF to show some flexibility but to no avail. Instead of softening its stance towards Pakistan, IMF Managing Director Kristalina Georgieva has hoped that Pakistan would avoid the path of Sri Lanka and stay on course implying that the IMF considers that it is not far from this position.

Though she maintained that Pakistan’s debt continued to be sustainable and that this status that would require the country to stay on course and ensure fiscal discipline yet the conviction in this assertion may clearly be seen as missing.

She emphasised however that IMF has been working very hard with the authorities in Pakistan within the context of the current programme to make sure that Pakistan has the policy framework that makes it possible to avoid any difficulty.

The economic difficulties are piling up as the delay in finalising the agreement for the 9th review has withheld the approval of the $1.1 billion tranche along with delaying the disbursements by the World Bank and other multilateral institutions.

The gulf between the IMF and Pakistan appears to have increased quite a bit as it was reported that the IMF asked Pakistan to meet the prior actions before signing the staff-level agreement and this demand was unprecedented and Pakistan was compelled to undertake them.

Despite laying down such harsh action and Pakistan complying with them, the IMF has expressed the view that all the issues remained unsettled until the deal was ratified by its executive board. It was reported that the finance minister asked the IMF to come clear on the timeframe of the staff-level agreement as the delay was now causing economic losses to the country amid growing nervousness in the markets but IMF is still taking its time whereas situation is fast becoming untenable for Pakistan.

Apparently there appears to be no hitch in finalising the agreement as Pakistan has so far implemented a mini-budget, increased electricity and gas prices and allowed the exchange rate to be determined by the market forces but all such prior actions that still could not get it the desired results.

It is also reported that Pakistan and IMF shared their respective positions on the $6 billion external financing requirements with particular focus on the sum that Pakistan needed from now till June to avoid default.

The IMF informed that Saudi Arabia had given confirmation about the $2 billion lending to Pakistan followed by the United Arab Emirates that confirmed its commitment to give $1 billion. It was reported that the finance minister urged the IMF to further cut the external financing requirement to $5 billion due to improvement in the current account deficit. The $6 billion financing gap had been worked out on the assumption that the current account deficit would remain around $7 billion in the current fiscal year.

During the first eight months of this fiscal year, the current account deficit remained at $3.9 billion.

In addition IMF was assured that in case the Fund signed the staff-level agreement, Pakistan would arrange the $2 billion additional loan from the World Bank, the Asian Infrastructure Investment Bank and the commercial banks but the IMF was asking for arranging commercial loans before the staff-level agreement and this is a demand that Pakistan is unable to meet in absence of the IMF umbrella.

On the other hand, the stringent conditions laid down by the IMF that Pakistan has complied with have created massive problems for the already ailing economy. In this context it is reported that surging interest rate has left no option for the private sector to borrow costly money for running their businesses or plan expansion.

The data showed that the banks’ advances to the private sector had been declining as the fiscal year is approaching closure and by now the borrowings have plunged by 74.3 per cent to Rs.266.4 billion during the first nine months of the current fiscal year compared to Rs.1,036.6 billion in the same period last year proving true the dictum that money never goes for risks and the current situation is full of risks.

It was reported that at the last auction of treasury bills held on 4 April it was visible that banks prefer to park their liquidity in government securities to earn risk-free high profits. The government picked Rs.2.2 trillion against the target of Rs.900 billion while the maturity amount was even less than the auction target. Banks have been making heavy investments in government papers.

More than Rs.15 trillion has been invested in the Pakistan Investment Bonds (PIBs) and over Rs.6 trillion in T-bills.

After the hike in base rate, all national saving schemes have correspondingly increased the levels of profit on them. The returns on saving accounts and certificates are linked with the central bank’s policy rates and are normally kept slightly higher to ensure better returns to small savers without drastically affecting the government budget.

However, the government is paying over 21 per cent returns to secondary market players in investment bonds and Treasury bills but still paying lower returns to its own citizens. Accordingly the profit rate on the Defence Saving Certificates by 261 basis points to 14.87 per cent as the rate was 9.29 per cent in May last year. Likewise, the returns on Behbood Savings Certificates, Pensioners’ Benefit Accounts and Shuhada Family Welfare Accounts have been raised by 264 bps to 16.56 per cent.

The return on Regular Income Certificates has been raised to 12.84 per cent of total investment, an increase of 24 bps. The profit margin on the three-year Special Saving Certificates and Special Savings Account was increased by over 400 bps to 17 per cent for the first five profits and to 17.8 per cent for the sixth profit.

The average return for this category now stands at 17.13 per cent compared to 13.1 per cent previously.