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.