On its Independence Day, Pakistan stares at bankruptcy
Thursday, August 16, 2018 IST
As Pakistan celebrates its Independence Day today, it is also grappling with a big economic crisis. The State Bank of Pakistan has only about $10 billion of foreign exchange reserves, which may not be enough to fund imports after two months. The country runs a serious risk of defaulting on its payments. The situation poses a challenge to Pakistan’s prime minister-elect Imran Khan who will be sworn in on August 18.
Imports exceed exports
The balance of payments crisis originates in the current account deficit, which is the value of imports exceeding the value of exports. Pakistan's current account deficit has grown four times in just two years. It touched $18 billion in FY18, up 42.5 per cent over the previous fiscal year. Two years ago, it was at $4.876 billion, rising to $12.621 billion the following year.
Why it happened
Between July 2017 and March, about 70 per cent of the country's import bill was for energy, machinery and metals, AFP reported. The import bill ballooned mainly due to higher oil prices and imports from China which is building several infrastructure projects in Pakistan under the China-Pakistan Economic Corridor programme. There was a marginal increase in exports which are mainly textiles. Pakistan has devalued its rupee four times since December with an aim to make its exports cheaper. The previous Nawaz Sharif government failed to take advantage of low oil prices to build foreign reserves. Corrupt regimes, faulty economic policies and low tax revenues have brought Pakistani economy to the brink.
The IMF option
The only option visible to Pakistan is to go to the International Monetary Fund (IMF) for loan. Pakistan has borrowed from IMF more than a dozen times since 1980. Though the total financing gap for the current fiscal is at around $12 billion, Pakistan could not get more than $9 billion from IMF according to its maximum quota. Pakistan hopes this could start a virtuous cycle in the economy and lead to closing of the remaining gap. However, for the IMF bailout, it needs support of several countries, including the US, which has warned the IMF against helping Pakistan as the country could use the IMF money to repay its China debt. “There’s no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself,” U.S. Secretary of State Mike Pompeo told IMF.
The trouble with IMF bailout
Even if IMF extends help to Pakistan, it will come with strict conditions which might include further devaluation of the currency, disinvestment in loss-making PSUs, hiking electricity rates and cutting agricultural subsidies. These condition will jeopardise Imran Khan's new government as well as hit economic growth. Khan has announced that he would run an "Islamic welfare state" hinting at higher public spending. So far, IMF has not made any promise to bail out Pakistan, nor has Pakistan asked for a bailout.
Other options
While Pakistan can also seek Saudi Arabia's help, the most the Gulf country can do is to defer oil payments. China, Pakistan's so-called all-weather friend, is another option. China's funding will not come with IMF-like conditions. But rising Chinese debt is already a worry for Pakistan. Borrowing from China would mean a higher debt burden. According to a Reuters report, China lent Pakistan $1 billion in June this year to boost its foreign reserves. With this, China’s lending to Pakistan in fiscal year ending in June breached $5 billion.
What Pakistan can do
The new Imran Khan government faces a tough task of turning around the economy. Khan is going to appoint Abdul Razzaq Dawood as his economic adviser. Dawood, an industrialist, was the commerce minister in Pervez Musharraf cabinet from 1999 to 2002. Khan needs to bring in economic reforms, restrict government spending and imports, try to increase tax revenues and take advantage of devalued currency to increase exports.
Related Topics
Related News & Articles
According to eyewitnesses and employees at the bakery, the entire ordeal lasted close to half an hour and did not escalate to violence.
Recently posted . 659 views . 1 min read
To mark the occasion, a grand ceremony was held at the Aircraft Manufacturing Factory in Kamra near Islamabad on Friday, the Pakistan Air Force (PAF) said in a st...
Recently posted . 650 views . 1 min read
Islamabad: A Pakistan court on Wednesday requested that an Indian lady, who was allegedly forced to marry a Pakistani man at gunpoint, be ousted to her nation, a me...
Recently posted . 628 views . 14 min read
Karachi: A video has turned into a web sensation demonstrating a young lady her poem at a show on the pathetic condition of ladies in Pakistan.
Be that a...
Recently posted . 761 views . 15 min read
HIGHLIGHTS
*A top Trump aide rapped Pakistan yesterday, again, for not doing enough to root...
Recently posted . 611 views . 4 min read
Trending News & Articles
ALMATY: Hour upon hour, day upon day, Omir Bekali and other detainees in far western China's new indoctrination camps had to disavow the...
Recently posted . 192K views . 1 min read
If you have payed attention to the belly buttons of people on the beach or the members of your family, you have probably noticed that they have different shapes and...
Recently posted . 8K views . 2 min read
In this age of terror, there might be nothing more terrifying than the thought of an attack carried out with chemical weapons. We’ve all heard the horrific ...
Recently posted . 3K views . 4 min read
Body fitness is one thing that everyone wants to maintain irrespective of age. Going to the gym and doing some great exercise always helps to maintain your body fit...
Recently posted . 3K views . 2 min read
More in Global
Reports suggested that the exercise would be captured and covered exclusively by an automobile magazine.
A 44-second video of...
Recently posted. 709 views . 2 min read
Washington: In the hardest direct activity yet by the US in Syria's six-year-old common war, US warships positioned in the Mediterranean Sea drizzled cruise mis...
Recently posted. 839 views . 32 min read
Sudan, the world's last male northern white rhino, aged 45, was being treated for age-related complications that had affected his muscles and bones and also gav...
Recently posted. 665 views . 1 min read
Recently posted . 540 views
Recently posted . 675 views
Recently posted . 1K views
Recently posted . 1K views
Recently posted . 1K views . 99 min read
Recently posted . 1K views . 67 min read
A new study published in Science Advances suggests that the solar system is probably a lot wetter than had previously been thought.
Recently posted. 719 views . 1 min read
We talk about plastic pollution so much we forget about other kinds of waste we dump that cause problems.
Recently posted. 651 views . 0 min read