Pakistan’s new government faces a host of challenges on the economic front such as low forex reserves, rising import bills, poor tax collection, unchecked corruption and unemployment, which require immediate and quicker remedies.
Analysts and global financial institutions believe that Pakistan will require around $28 billion to meet its financing needs and the new government could potentially raise approximately $20 billion through multiple sources including a $12 billion bailout from the International Monetary Fund (IMF), $2 billion from China and $6-7 billion from Saudi Arabia and the Asian Development Bank.
The availability of all these funds will help ease pressure on the rupee, meet the dollar shortfall as well as meet import bills for a longer period.
On Monday, Mike Pompeo, US Secretary of State, warned that any potential IMF bailout for Pakistan’s new government should not provide funds to pay off Chinese lenders.
Pompeo said the US looked forward to engagement with the government of Pakistan’s expected new prime minister Imran Khan, but said there was “no rationale” for a bailout that pays off Chinese loans to Pakistan.
“Make no mistake. We will be watching what the IMF does. 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,” Pompeo said during an interview with CNBC.
Atik Munshi, senior partner, Crowe, believes $12 billion bailout may only suffice for a short period, hence, the finance ministry needs to come up with an innovative budget and look for private-public partnership to take the state to the next level.
Munshi pointed out that challenges would be tough for the new government because expectations are high.
Since rupee has also taken a beating since December 2017 and was devalued four times by five per cent, Munshi hoped that the finance minister’s priority would be to stabilise the currency and increase foreign reserves.
“Apart of the immediate measures the finance minister would need to streamline government collection sources. Pakistan’s manufacturing sector is far from international standards in many aspects, and finance ministry may give incentives in this area. Foreign remittances could also be made easy,” he said.
“The new government will need to work on areas of effective tax collection, fighting corruption in both government and non-government areas, more security and peace, good relations with neighbours and a strong foreign policy. The new government’s focus is expected to be on development and growth,” Munshi said.
The IMF has assessed Pakistan’s gross external fining needs at $27 billion for 2018-19 fiscal year but warned that obtaining loans at a favourable rates will be a difficult task due to country’s debt sustainability challenge.
The latest figures show that Pakistan’s external debt also increased to $92 billion in the first quarter of 2018 from $89 billion in the fourth quarter of 2017. External debt averaged $53.53 billion from 2002 until 2018, reaching an all-time high of $92 billion in Q1 2018. Development may need further funds hence it will not be surprising if government resorts to more external debt.
Pakistan’s current account deficit has also widened 43 per cent to $18 billion in the fiscal year that ended on June 30. The IMF had forecast that the South Asian country’s external debt will jump to $103.4 billion by June 2019.
Kamran Ahmed, vice-president for legal affairs and secretary general for Pakistan Business Council in Dubai, stressed that PTI chairman Imran Khan has good credibility and perception on the international level.
“Sentiments are positive and we hope that foreign investment will flow into the country if the new government works efficiently on the roadmap that it has given,” he said.
Ahmed suggested that if the new government can win trust of the overseas Pakistanis, then there will be huge inflow of investments from them and the government will not have to approach the IMF for the loan.
In addition, he said, “China is not going to use China-Pakistan Economic Corridor for transit only. Now Chinese companies are also interested in putting factories in Pakistan and this will help reduce unemployment and availability of products at cheaper rates in Pakistan,” he added.