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Pakistan Economy: Debt, Chaos Order and Bailout

PKonweb Report (Oct 13, 2018): On Thursday, the PTI-led government formally began the process of seeking an I.M.F. bailout worth up to $12 billion amid reports that the country’s financing gap may be as high as $20 billion which could be met by loans from China, Saudi Arabia and the UAE.

Talking to reporters in Islamabad on Saturday after returning from Indonesia, where he attended the annual meetings of the World Bank and IMF, Finance Minister Asad Umar said the country is having to go to the IMF once again due to the flawed economic policies of the previous government.

Ashraf Wathra, the former central bank governor under the previous PML-N led government told the New York Times that the previous government is at fault for the ballooning national debt, and that Mr. Khan should have taken the overwhelming advice from economists to go to the I.M.F. as soon as possible.

Many observers and several independent economists say the “financial chaos” was in the making. The US$6.6 billion IMF bailout package previous government received were used up without implementation of the harsh conditions IMF had attached with it. The same conditions, and even more, are expected to be attached with the bailout package the PTI-led government now seeks — mostly to pay up for interests and loans taken over the last 10-year period — during the PML-N and PPP rule.

In a cabinet meeting, Prime Minister Imran Khan instructed the finance ministry to provide a detailed analysis of utilization of Rs24 trillion worth of debt that the country acquired from 2008 to 2018.

It has now become an obvious national security issue despite coherence achieved by the military in the internal security and stability domain, experts say.

Umar however reassured that the government will not accept any condition from the IMF that could harm Pakistan’s national interest. “The decisions are to be taken by us, not the IMF,” he added.

He also dismissed US statements about reviewing Pakistan’s debt position before evaluating Islamabad’s request for a loan from the IMF.

The US said that it will examine closely Pakistan request for a loan from the International Monetary Fund (IMF), adding that “part of the reason that Pakistan found itself in this situation is Chinese debt” related to CPEC — “it has led to massive imports from China, it has left Pakistan with a lot of debt. It has also led to the emergence of a big current account deficit,” said Gareth Leather, a senior economist at Capital Economics to Aljazeera.

The US State Department spokesperson Heather Nauert while speaking to media during a state department press briefing said, “I think part of the reason that Pakistan found itself in this situation is Chinese debt and the fact that there is debt that (previous) governments have incurred that they may have thought wouldn’t be so tough to bail themselves out of, but has become increasingly tough.”

Umar said US does not hold the power to veto decisions by the Fund — US is the largest contributor to the IMF and has 17.68 per cent of voting rights in major decisions. China is third, behind Japan, and controls 6.49pc of the vote.

Umar while defending the PTI-led government’s decision to approach IMF for a bailout, saying it was “inevitable” and that the country immediately needs $12 billion and the crisis could worsen if Pakistan does not opt for a loan program.

He said efforts are underway to obtain foreign exchange from other sources as well.

“We are going [to the IMF] for the 19th time and we wish that is it the last time we do so,” the minister said, announcing that an IMF delegation will reach Pakistan on November 7 for talks on the program.

He said there was no truth to the reports that Pakistan had agreed to some “conditions” in exchange for help by Saudi Arabia, China and the United Arab Emirates.

Umar said talks are currently underway regarding oil supply on deferred payment from Saudi Arabia. A proposal to secure oil for three months on deferred payment is currently being considered, the minister revealed.

On Thursday, the fund’s managing director, Christine Lagarde said Pakistan provide “absolute transparency” on its debts, many of which are owed to China as part of its Belt and Road construction program. Pakistan is showcase for China’s initiative, hosting up to $60 billion of Chinese investments, most financed by costly loans taken from Chinese state-owned banks to build power plants — the country has been facing energy crisis for a decade.

Of the estimated $60 billion in CPEC investments, over $28 billion worth of projects are currently at various stages of implementation. Most of the investment, estimated at over $22 billion, has been made in the energy sector, which remains a concern for the IMF, according to sources in the planning ministry.

Any bailout for Pakistan would require “complete understanding and absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country,” Ms. Lagarde said, as she prepared to meet the Pakistani delegation later Thursday at the I.M.F. and World Bank Group annual meetings in Bali, Indonesia.

Later that day, the I.M.F. released a statement saying that Ms. Lagarde had met the Pakistani team and that the fund would send a team to Islamabad in the coming weeks to initiate discussions for a bailout program.

Ahead of July elections, Mr. Khan promised to open up the books on Chinese investments and even cut projects that were unnecessary or too costly. The previous government, led by ousted Prime Minister Nawaz Sharif, was harshly criticized for refusing to publicly disclose the financing terms and conditions around China’s investments, leaving the country in the dark about exactly how much debt it has committed to repay.

Critics of the previous Pakistani government accuse it of doing a poor job negotiating the Chinese loans and say that the costs were often inflated, leaving Pakistan with a debt load it will struggle to repay.

The federal government’s total debt swelled to 72.5% of gross domestic product by June this year, which is considered unsustainable for a developing country like Pakistan.

In a cabinet meeting, Prime Minister Imran Khan instructed the finance ministry to provide a detailed analysis of utilization of Rs24 trillion worth of debt that the country acquired from 2008 to 2018. The IMF seeks full disclosure of the debt Pakistan has acquired including from China.

The IMF has also made public what it expects from Pakistan in return for extending a loan. “Policies should include more exchange rate flexibility and monetary policy tightening, further fiscal adjustment … strengthening the performance of key public enterprises (such as Pakistan Steel, PIA) together with further increases in gas and power tariffs,” said a statement the IMF issued last Thursday.

Finance ministry sources said the IMF demanded depreciation of the rupee by over 20% and increase in key interest rate to 12.5%.

Both Pakistan and the IMF have already covered significant ground during a week-long staff-level visit of an IMF team to Pakistan that ended last week. However, some thorny issues remained to be addressed including the extent of new measures and disclosure of details of China-Pakistan Economic Corridor (CPEC) projects ” to really understand the extent and composition of that debt, both in terms of sovereign, in terms of state-owned enterprises and the like of it, so that we can actually really appreciate and determine the debt sustainability of that country, if and when we consider a program”, said Lagarde before meeting Umar in Indonesia on the sidelines of IMF-World Bank annual meetings.

Pakistan is ready to share details of CPEC debt with the IMF and the decision to approach the Fund was taken after consultations with friendly countries, said Finance Minister Asad Umar on Saturday.

He was speaking at a press conference after he returned from Indonesia.

The IMF, he said, had asked for details of loans, including ones secured in relation to CPEC projects, for analyzing the debt sustainability.

Mushtaq Khan, an economist and former chief economic adviser at the State Bank of Pakistan, acknowledges that the country’s debt to China is rising. But he says Beijing “cannot afford” to bankrupt Pakistan — in part because of the country’s importance as a counterweight to India, a regional rival of China’s.

“China’s primary interest in Pakistan is geopolitical rather than strictly economic, and therefore, for China, repayment of the debt burden will be secondary to maintaining a good political and economic relationship with Pakistan,” Khan told Nikkei Asian Review and The Banker.

On November 3, PM Khan goes to Beijing to discuss CPEC, debt, and exchange mutual assurances for bringing order amid chaos, notwithstanding the conditional bailout package his government has sought from the IMF.






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