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
Bilawal Bhutto Zardari decried the contrast between the punishment given to his mother and his father, and the lack of action against groups that killed children in...
Recently posted . 913 views . 2 min read
Prime Minister Narendra Modi on Tuesday (28 January) while speaking at the annual National Cadet Corps (NCC) rally said Citizenship Amendment Act (CAA) was brought ...
Recently posted . 1K views . 2 min read
NEW DELHI: Recently sworn-in prime minister Imran Khan said Pakistan would grant citizenship to all Afghan and Bangladeshi refugees born in the cou...
Recently posted . 766 views . 1 min read
Donald Trump's astound decision as US president has Pakistanis wary that he may quicken what they see as a move in American strategy to support curve adversary ...
Recently posted . 880 views . 34 min read
Pakistan has repeatedly altered the status of the parts of Kashmir it controls, weakening its current protestations.
Recently posted . 760 views . 1 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 . 209K 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 . 10K views . 2 min read
The Langya henipavirus has a place with a similar group of infections, including Nipah, which is known to kill up to 3/4 of people in extreme cases.
Recently posted . 5K views . 1 min read
Queen's death: The eldest of her four children, Charles, Prince of Wales, who at 73 was the oldest heir apparent in British history, became king immediately...
Recently posted . 5K views . 1 min read
More in Global
किसी भी चिड़िया को डायबिटीज नहीं होती।
किसी भी बन्दर को हार्ट अटैक नहीं आता ।
कोई भी जानवर न तो आयोडीन नमक खाता है और न ब्रश क...
Recently posted. 510 views . 1 min read
Over 8.7 million views for her photoshoot video
Recently posted. 690 views . 0 min read
Rumi is quoted to have said: “The breeze at dawn has secrets to tell you. Don’t go back to sleep. You must ask for what you really want. Don’t go ...
Recently posted. 837 views . 1 min read
Recently posted . 848 views
Recently posted . 906 views
Recently posted . 2K views
Recently posted . 2K views
Recently posted . 3K views . 99 min read
Recently posted . 3K views . 52 min read
Russia Today reported that global internet users might experience network connection failures as the main domain servers and its related network infrastructure will...
Recently posted. 1K views . 1 min read
With Armageddon creeping in closer and closer, experts are warning us of the possibilities of a total insect wipeout, that would emulate the...
Recently posted. 955 views . 1 min read