Living on Borrowed Time

The reimbursement by the United States of 1.1 billion dollars to Pakistan under the Coalition Support Fund (CSF ) seems to have evoked a sense of relief in the government.  But officials minimise the fact that this ‘respite’ will be short lived especially as a number of repayments to the International Monetary Fund loom. The official calculus is one determined by the time frame of the upcoming election rather than the country’s economic interests.
The government’s worry has been how to get to the election without encountering a foreign exchange crisis. When the CSF was suspended and other external financial inflows began to decline, doubts grew about the country’s ability to finance the balance of payments gap and meet foreign liabilities in the months ahead.
The $1.1 billion shores up an otherwise weakening reserve position, but only momentarily. The inflow of funds postpones by a few months the inevitability – if no remedial policy action is taken – of a full-blown financial crisis being generated by growing external vulnerabilities.
A confluence of negative trends in the past few years has worsened the fragile state of public finances. The balance of payments position has become more precarious and reserves have been steadily falling. In July reserves held by the State Bank were $10.4 billion. Another $ 4.4 billion held by commercial banks are leveraged and not available to finance the balance of payments deficit.

A confluence of negative trends in the past few years has worsened the fragile state of Pakistan’s public finances. The balance of payments position has become more precarious and reserves have been steadily falling. In July reserves held by the State Bank were $10.4 billion. Another $ 4.4 billion held by commercial banks are leveraged and not available to finance the balance of payments deficit. The greatest short-term danger to the country’s financial stability comes from the sharp rise in the current account deficit.

The greatest short-term danger to the country’s financial stability comes from the sharp rise in the current account deficit. This shot up to $4.5 billion in 2011-12 compared to a surplus of $214 million in the preceding year. This is principally due to worsening in the foreign trade deficit, which widened to $15.3 billion in the outgoing fiscal year from $10.5 billion in 2010-11.
Imports have risen sharply while exports have declined. This is due not so much to weaker demand in Pakistan’s largest market, financially troubled Europe, but because of falling global cotton prices. Falling exports also reflect disruptions being caused by the most serious power shortage in the country’s history.
Remittances from overseas Pakistanis have been the big saving grace, reaching $13 billion in 2011-12. But with other external inflows tapering off, remittances and export earnings are not sufficient to meet the balance of payments financing requirements, especially when the capital account has been deteriorating.
Against this backdrop, the view that $1.1 billion of Coalition Support Funds provides a reprieve underestimates the impact on the reserve position of the accumulation of external liabilities.
A significant part of these liabilities are repayments to the Fund for the $8 billion loan Pakistan secured in 2008. Already repayments earlier this year have reduced the reserve cushion. Between now and December, Pakistan needs to pay $1.1 billion to the Fund. Another $800 million will be due when the government is obliged to call elections, in March 2013.
The key question is this. With reserves dwindling to less than adequate levels and by early 2013 to where they will cover just over a month of imports, how will the incipient financing crisis be addressed? The short answer, already being contemplated by the government, is to go back to the IMF for assistance. But here is the rub. Government figures have indicated they would prefer an interim government to negotiate a new programme and take the political heat of “prior actions” that will be necessitated.
There are at least two problems with this pass-the-buck approach. One, it can no longer be assumed that the IMF will be willing to conclude an agreement with an interim administration. The Egyptian case has set a recent precedent. Before agreeing to a $3.3 billion loan, the Fund insisted on a broad political buy in, which the interim government wasn’t able to deliver. And in Greece, where an agreement had to be concluded with an interim government to avoid an imminent crisis, the Fund asked for the leaders of the main parties to also sign up to this.
The second problem with the government’s approach is that delaying corrective policy action will mean a bigger economic mess next year. A more severe fiscal adjustment will then be needed. The people of Pakistan would then end up paying an even heavier price for a self-serving coalition that prioritises its interests over that of the country.
(Dr. Maleeha Lodhi served as Pakistan’s ambassador to the US and United Kingdom)
Khaleej Times

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