The Federal Finance Minister has said that Pakistan doesn't need further IMF support even though IMF has disbursed only $8.2 billion of the $11.4 billion under its Stand-By Arrangement (SBA). The Finance Minister sounded optimistic about Pakistan repaying the IMF as per the agreed schedule.
But the confusing part of his press talk was the admission that, whether Pakistan continues to avail IMF funding or not, it would continue economic and energy reforms that will require spending an additional Rs 300 billion. What he didn't disclose was the sources (hopefully, not currency printing presses) that would fund these outlays.
Whether it is optimism about Pakistan's ability to put its house in order and start repaying rather than seeking more credit, or Pakistan's inability to meet the SBA conditionalities that is forcing Pakistan not to seek disbursement of the remaining SBA amount is, very justifiably, the subject of a debate in Pakistan.
The Finance Minister's optimism is based on the fact that, compared to July-August 2010, during the same period in 2011, the current account deficit contracted to $189 million from $1.019 billion, exports went up from $3.465 billion to $4.167 billion, and inward remittances registered a huge growth. Finally, exchange reserves once touched $18.3 billion.
But imports too went up by 19.5 percent compared to the 20 percent rise in exports, and may rise further given the crop loss caused by the heaviest monsoon rains in Sindh in recent years. The media is already forecasting that, not just cotton and sugar, but even vegetable may have to be imported. As the flood loss estimates are updated, GDP growth will contract and more resources will be allocated to urgent rehabilitation work, which will expand the fiscal deficit and reduce Pakistan's debt servicing capacity. Besides, the average oil price during July-August 2011 has been $113 per barrel compared to $93 a barrel in 2010-11.
In the developing scenario, it seems that the Finance Minister is either being too optimistic about continued growth in exports and foreign remittances or, perhaps, he has received assurances from some quarters (Friends of Pakistan?) about meeting Pakistan's needs because the floating debt paper in foreign markets won't succeed.
It was only appropriate that any such assurances should have been shared with the media to justify the stand taken by the Finance Minister with regard to the IMF. In the absence thereof (which builds fears of a possible loan default by Pakistan) the slow but steady decline of the Pak Rupee could gain momentum.
There is confusion about the agreed repayments to the IMF in FY12. Recently, rumours suggested that Pakistan didn't repay the $1.4 billion due in 2010-11, but the issue subsided due to IMF's silence thereon. This issue required a clarification by both the government of Pakistan and the IMF.
Earlier, the figures released by the government suggested that the amount repayable to the IMF in 2011-12 was $3.2 billion. Now the Finance Minister says that Pakistan would comfortably repay $1.2 billion to the IMF in 2012. Fine, but did negotiations with the IMF bring this figure down or was there a reporting error earlier?
Pakistanis want to trust their Finance Minister's optimism, but they seek credibility checks thereof to plan their lives. Over-optimistic assumptions suggest that, with exports rising to $28 billion and imports freezing at $38 billion, remittance inflow of $13 billion could offset the trade deficit of $10 billion and leave a surplus of $3 billion. But that isn't all.
Even if we assume no other use of foreign exchange (including on defence or on Pak-Iran gas pipeline), what about debt servicing? In 2010, without any repayment to IMF, it was $5.7 billion. Even with the IMF repayment down to $1.2 billion debt servicing could be around $7 billion. How do we propose plug the remaining $4 billion gap? If existing reserves are depleted, won't the rupee slide rapidly?
To begin with, the deceptive growth in exports last year owed itself to a phenomenal rise in the global price of cotton and by exporting far more of raw cotton compared to its value-added products, we missed out on the opportunity to maximise exchange earnings. This year the scenario has changed radically.
Because there have been bumper crops globally, exporting raw cotton (or even yarn) would earn far less. But, tragically, we failed to implement a strategy that could assure the textile sector uninterrupted power supply to operate at full capacity and produce value-added goods at globally competitive prices. As for high export proceeds received during July-August 2011, which are being highlighted as indicators of a rise in exports in FY12, they are not on account of exports in FY12; they represent exports made last year on very high prices. So much for the hopes of a huge rise in exports in FY12!
Courtesy high inflation, and reduced savings and bank credit, imports of peripheral importance have certainly gone down. But the fact that Pakistan has become overly dependent on oil, as the fuel for its power sector, the risk of high compensatory rise in imports can't be sidelined given the strength of the cartel called Opec.
As for non-trade inflows, FY12 statistics show a drop in foreign direct and portfolio investment, and since no state assets were privatised after 2008, inflows on account of instalments of asset sale price are also down. The total drop in these categories in July-August 2011 compared to the same period in FY11 has been $478 million.
As for high exchange reserves (prodding the Finance Minister's optimism), the state's share therein never exceeded $14billion, and over half thereof represented funds borrowed from the IMF. Surely, the Finance Minister knows how the world perceives such reserves in the context of sustaining the Rupee's exchange value.
None of these indicators support the Finance Minister's optimism, which suggests that Pakistan's decision to stop borrowing from the IMF has to do with two things: initial failure in negotiating with the IMF targets that could be achieved, and subsequent failure in achieving any of the agreed targets.
If the Finance Minister really wants to say good-bye to the IMF, he must exercise unbridled authority to cut fiscal waste in all ministries, shake-up the FBR to ensure that the tax-to-GDP ratio grows by 1 percent annually, push for improvement in internal security to reduce Pakistan's country risk to attract foreign investment and prepare non-essential state-owned enterprises for privatisation. Working for a regime that has wholly different priorities, he can't do this; the fact that no target agreed with the IMF was met, doesn't build such a hope.