For Pakistan, its economic cycle starts with taking a bailout package from the International Monetary Fund and other international banks plus friendly nations and then, after utilizing the loans in a highly inefficient way, it ends up knocking on the doors of same entities for another bailout. Pakistan has to do something that every sovereign nation-state does: produce, export, save and consume efficiently.
I wish I had Finance Minister Asad Umar’s phone number so that I could tell him personally how things should be made to work correctly. However, he is too busy nowadays handling a shaky economy, which is standing hopelessly on the verge of an ultimate collapse.
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On Thursday, IMF managing director Christine Lagarde said at the 2018 International Monetary Fund and World Bank Group Annual Meeting at Nusa Dua, Bali, that the (so-called economic magician) finance minister of Pakistan, Asad Umar, had requested financial assistance from the IMF to address its economic challenges. She added that the request came during her meeting with Umar and central bank governor Tarik Bajwa on the sidelines of the annual meetings.
So Islamabad has once again approached the IMF for a bailout as it struggles to raise money for imports and to clear debts. Pakistan’s US dollar reserves have dropped to $8 billion, only enough to pay for 2 months worth of imports. In the fiscal year that ended in June 2018, the value of the country’s exports was $23.22 billion while, imports exceeded $60 billion.
Pakistani Prime Minister Imran Khan is known for the slogans he used during his election campaign, that if the nation would give him a chance to form the government, he would break the country’s addiction to going to the West with a begging bowl. Furthermore, he has presented himself as a man who would commit suicide if asked to take a bailout package from the IMF.
Finally on October 8 those lofty claims collapsed like a house of cards, when Umar announced that the country was facing dire economic crises and to pull it out, the government had decided to seek a big loan from the IMF.
Going to the IMF was a last resort. Even as late as October 7, Khan was hoping for help from friendly countries, that is, China and Saudi Arabia. But neither of them offered help to Pakistan in these extreme financial crises. Saudi Arabia did offer an investment in the China-Pakistan Economic Corridor (CPEC) in the form of an oil refinery in Gwadar, the port city in Balochistan, but on October 2, Minister for Information Fawad Chaudhry and Planning and Development Minister Khusro Bakhtiar clarified that Saudi Arabia would not be the third partner in the multibillion-dollar economic corridor.
Why would China agree on adding a partner that is known as the most vital non-NATO ally of the US in West Asia and known for backing US interests? Also Saudi investment in Balochistan, which shares a border with Iran, would for sure be something on which Iran would raise concerns. ▶That would bring China directly or indirectly into the Saudi-Iran issue and furthermore could act as a source of sectarian conflicts in Pakistan. Neither would Saudi involvement in CPEC prove to be favorable for Pakistan or for China, and possibly all this resulted in the investment deal getting revoked.
Why didn’t China bail Pakistan out?
The fact that China didn’t lend money to Pakistan is also shocking. It could be a strategy to portray itself as a country that is not indulging in “debt-trap diplomacy.” The West on every occasion has accused China of burdening less developed countries under multibillion-dollar debts, which it provides them in the name of investment in transport and energy sector development and when the nation defaults, it simply asks it to hand over the assets it has financed. In the case of Sri Lanka it was Hambantota Port, and it could be Gwadar Port in the case of Pakistan.
Another reason could be that Imran Khan’s government may be worried about the increasing dependence of Pakistan on China for its financial needs. You may be aware of a Financial Times report in which Khan adviser Abdul Razak Dawood was quoted as saying that “the previous government did a bad job negotiating with China on CPEC – they didn’t do their homework correctly and didn’t negotiate correctly so they gave away a lot.” This shows that the Khan administration is skeptical of the actual reasons behind CPEC. That is positive for Pakistan. Better late than never.
Pakistan’s problem isn’t only bad macroeconomic management. It is the money China is lending under CPEC, which Pakistan then uses to pay for imports from China that are then utilized on CPEC projects. Machinery imports alone from China in the first two years of the project raised the current-account deficit by 50%. Remember that the total cost of CPEC is $62 billion.
I don’t think Pakistan can afford all these costly projects. But Umar for whatever reason has said, and the Financial Times reported, that the government would not follow the track of Mahathir Mohamad, referring to the newly elected nonagenarian Malaysian prime minister who has warned about the risk of Chinese “neocolonialism.” Malaysia has canceled three China-backed pipeline projects and put a showpiece BRI (Belt and Road Initiative) rail link under review. Mr Minister, angels won’t come to the government with dollars in their hands so that it can repay huge loans to China.
Debt trap and neocolonialism
China forces Pakistan to buy Chinese equipment for use in Chinese projects, shredding its reserves; then Beijing extends loans to cover the purchases, which sends Pakistan’s debt soaring. Furthermore, “Chinese companies received tax breaks, many breaks and have an undue advantage in Pakistan; this is one of the things we’re looking at because it’s not fair that Pakistan companies should be disadvantaged,” Dawood, the Pakistani cabinet member responsible for commerce, textiles, industry and investment, told the Financial Times.
Just after the Asad Umar announced the government’s decision to seek a bailout package from the IMF on the night of October 8, came the substantial single-day stock-market loss by more than 1,300 points, losing almost 270 billion rupees ($2 billion) of its capitalization.
Also on October 9 the rupee plunged about 7% compared with Monday’s close of 124.27 to the dollar, as reported by Bloomberg. This will make imports expensive, that is, cost-push inflation, and because it is highly likely that the rupee will devalue again, the burden will be passed on to the consumers, and in all that the lower and middle classes will suffer.
Inflation rate may hit 14%
The IMF has projected that the average inflation rate in Pakistan might hit 14% by June next year – a level that if reached could result in interest rates peaking to 15% and the economy drastically slowing down, government sources say. Such a high level of inflation would also carry implications for Prime Minister Imran Khan’s most ambitious flagship program of constructing 5 million low-cost housing units. The banks lend money over and above the policy rate, which will reduce the government’s options to provide subsidies on housing loans.
Because of stabilization measures, the IMF is also projecting an economic growth rate of below 3% for fiscal year 2018-19. These assessments were shared with Pakistan during a staff-level visit from September 27 to October 4. The IMF’s assessment of average 14% inflation was based on at least four assumptions. These were an increase in prices of gas, an increase in power tariffs, devaluation of rupee against the US dollar that will affect almost every consumable item, and increases in prices of petroleum products due to rupee devaluation and higher global crude-oil prices.
What does the superpower say?
Asked at a news briefing last Thursday how the United States would deal with Pakistan’s request for a bailout, State Department spokeswoman Heather Nauert said: “In all cases, we examine that closely from all angles of it, including Pakistan’s debt position, in evaluating any type of loan program.”
Nauert also blamed Pakistan’s loan arrangement with China for the country’s economic woes.“I think part of the reason that Pakistan found itself in this situation is Chinese debt and the fact that there is debt that governments have incurred that they maybe thought wouldn’t be so tough to bail themselves out of, but has become increasingly tough,” she said.
In an interview to US television network CNBC in July, Secretary of State Mike Pompeo said the United States would not allow Pakistan to use the US taxpayers’ dollars to repay China.
“Make no mistake: We will be watching what the IMF does,” he said.
China enjoying Pakistan’s piece of cake
Pakistan is seeking its largest ever loan package of up to $8 billion from the IMF to bail itself out from a severe crisis that threatens to cripple its economy. The IMF could place strict conditions on the package, forcing Pakistan to seek additional loans to meet those restrictions, and this could expand the loan facility to $12 billion.
It is clear that Pakistan’s nearly collapsed economy needed a dollar injection on an urgent basis. To seek a bailout from the IMF was the matter of “when is the right time” rather than “maybe we need one.” Khan’s government was just waiting for the right time. It showed fake austerity by auctioning Prime Minister House cars and buffaloes, while at the same time traveling short distances in a helicopter on taxpayers’ money; at the end of the day the fate was an IMF bailout.
There is nothing wrong in taking help from a “friendly” nation (in the case of Pakistan, that is China) for the sake of energy and transport sector development, but as▶ the world works on the theory of realism and capitalism, there is nothing like a free lunch. China is securing its interests in the multibillion-dollar CPEC, and even enjoying Pakistan’s piece of the cake.
📌The problem is that Pakistan does not understand China’s strategy of predatory lending and debt-trap diplomacy. Without structural changes of the sort that lenders like the IMF demand – and which Pakistan, for one, has constantly postponed – crises such as the one Islamabad now faces are inevitable.
Only after Pakistan begins to export more to the world will it be able to pay for the investment it needs for developing the transport, energy and industrial sectors without depending on any other country. Currently, the export-to-GDP ratio is below 10%, far lower than other countries in the region. To boost exports it can work on duty-drawdown schemes, increasing the availability of short- and long-term credit to exporters, simplifying regulations related to exports, improving cooperation among exporters and between the government and business actors, and much more.
If no macroeconomic structural changes are made to protect it from indulging in debt traps, unfortunately again after a few years Pakistan will ask for another IMF bailout package because of declining foreign reserves and a skyrocketing current-account deficit.