by Shiraz Nizami
Nawaz government has struck a deal with International Monetary Fund for $5.3 billion extended loan facility, intended to rebuild foreign exchange reserves, pull the plug on energy crisis and a sliding currency in Pakistan. Though, it was a contradiction of PML (N)’s election manifesto, but the government’s finance minister says there was no way out to retire from past liabilities.
The country had long been discussing a fresh bailout package from the IMF after abandoning $11.3 billion loan program in 2011 after the PPP led government refused to carry out strict financial reforms.
The program, which is worth $5.3 billion, will carry a floating interest rate of 3% and would be payable over a longer period than conventional arrangements to facilitate Pakistan in repaying the loan, IMF’s Pakistan Mission Chief, Jeffrey Franks told the journalists.
Franks said that it is a Pakistan designed and built program. “The government has developed plans to improve tax collections through improved administration and through a mechanism to eliminate loopholes in the coming years,” Franks said, adding that the difficult decisions have already been made. It is hoped that this announcement of support from IMF would encourage other development partners to extend a helping hand to Pakistan
Though, unanimously agreed that acquiring bailout package was badly needed, economists differ on impact of IMF’s loan on inflation, money supply and economic growth. The critics argue that the government must rely on country’s own resources as the new loan is a continuation of pushing the economy into an unending debt trap. They argued that since Pakistan joined the IMF in 1988, the country has availed 11 loan programs. However, all standby arrangements, except for one, did not reach the conclusion because of lack of implementation of tough conditions.
The economists suggest local options to raise revenues, e.g. seeking help through the forum of “Friends of Democratic Pakistan”, obtaining oil facility from Saudi Arabia on deferred payments, recovering USD 800 million pending amount of PTCL’s 26% shares that was sold to Etisalat, and generating about USD 800 million by auctioning 3G license and increasing tax revenues by capturing tax evaders and via expending the tax net.
It is also suggested that alike India, Pakistan’s government can borrow from overseas Pakistanis by issuing securities like bonds. By these entire means, the government could raise USD 3 – 5 billion collectively. They also raise a concern that the supply of dollars from the IMF will result in devaluation of rupee up to Rs 105 against a dollar.
Long lists of recommendations are there but no one tells how to fasten the bell in cat’s neck.
The government supporters say that the previous government had borrowed extensively during its five-year tenure that shoot the country’s total debt from USD 50 billion to USD 64 billion. Now, it is the time to repay those obligations, with around USD 3 billion payments of interest and principal amount scheduled during the second half of 2013 alone. The existing reserves with the State Bank of Pakistan (SBP) are hardly USD 4 billion (excluding commercial bank liabilities), which are barely enough to foot the import bill of one month against the standard benchmark of having enough reserves to foot the import bill of next six months. Under the above circumstances, “borrowing” from IMF is the most logical choice to repay foreign obligations, boost foreign reserves and restore investors’ confidence.
Moreover, the concept that paying off low interest IMF loans by floating junk bonds to Pakistani expatriates is ludicrous. Pakistan has to borrow money because its tax to GDP rate is one of the lowest on earth as it won’t charge market rates for fuel/utilities, doesn’t enforce collection of bills (taxes, utilities etc), won’t cut military expenditures etc.
The government in power has already shown its mood to implement tough decision like increase in tariffs for electricity and gas, abolishing subsidies, eliminating the circular debt by printing currency, abolishing tax exemptions, tightening the monitory policy, and extension in the tax net. The government plans to generate additional revenues of Rs300 billion in a year by applying all this, but clearly, all this will squeeze the public.
Up to Rs 3/unit increase in power tariff, broadening of tax net and printing of additional Rs500 billion to pay off circular debt will ultimately have an impact on inflation. The SBP’s tight monetary policy to control inflation will limit the availability of credit to businesses and will slow down business activity. Thus, there would be an increase in prices in coming months and the GDP growth will be lower than expectations which may damage the popularity of incumbent government.
However, the newly installed government would boost its public support if it successfully revamps the loss making public sector enterprises e.g. Railways, PIA, Steel Mills, PEPCO and turns them into profitable concerns and saves up to annual loss of Rs 300 billion to national exchequer because of these white elephants.