Search results for: “”

Pakistan’s foreign exchange reserves have been depleting during the last one year and is heading towards a default risk as Sri Lanka did.

Pakistani economy is said to have been crippling since the discontinuance of US ‘military’ aid which it had used

What is the news?

• The Pakistani rupee has been on free fall; from 150 in April 2021 to 213 against the dollar on 21 June, an all-time low.
• This would mean high oil and electricity prices, to outrage the people who are already to the streets due to ousted PM Imran Khan.
• The government-International Monetary Fund (IMF) talks have remained complicated.

Options available for Pakistan

• Pakistan is under deep Balance of Payment (BoP) crisis (as was India in 1991).
• Pakistan has exhausted all credit options as SL did.
• Even the China Pakistan Economic Corridor (CPEC) is at standstill.
• Even the Saudi’s and so called ‘caliphate’ of Turkey has not come to Pakistan’s rescue.

Only option left: IMF bail out

• The immediate future of Pakistan’s economy would depend on IMF resuming its support.
• Despite an intense discussion between the two, there has not been a consensus until now.

What is IMF bail-out?

• Bailout is a general term for extending financial support to a company or a country facing a potential bankruptcy threat.
• When a country asks the IMF for a loan, the country is facing a major economic crisis.
• In particular, it does not have enough foreign currency (‘dollars’) to pay for imports and the repayments on its loans. In short, the country cannot pay its international bills. So, it need a bailout.
• The IMF will give the country an aid, which is ‘cash’ in the sense that it does not have to be spent on a particular project. This money can be used to pay its bills.
• But, the IMF will impose certain conditions. The basic condition is to spend less – both domestically and internationally.
• This belt-tightening is not easy – people lose jobs, prices rise, etc. And, one has to repay the loan.
• These conditions are necessary to ensure that the money is being spent where it is supposed to.

Pakistan and IMF: A track record

• Pakistan’s relationship with the IMF has remained complicated. It sees conditions laid as a breach of sovereignty.
• Though Islamabad has been negotiating with the IMF repeatedly, there has been an economic nationalism, mostly jingoistic, against approaching the IMF in recent years.
• Imran Khan, the former PM made statements and fuelled the sentiments against the IMF.
• After becoming the PM in 2018, he preferred approaching friendly countries (China and Saudi Arabia) and avoiding the IMF.
• The new government is now back to the IMF; it expects the IMF to release the payments, expand the support programme, and give a longer rope to repay.

Conditions laid out by IMF for recent bail-out

• The IMF is willing to support Pakistan but has some conditions regarding macroeconomic reforms.
• It wants Pakistan to be transparent about its debt situation, including what Islamabad owes to China, as a part of the CPEC.
• Terror-financing in Pakistan is the most favored type of investment!
• The IMF may agree to support after a few more promises by the government.
• But the relief may be less than what Pakistan would hope for.

A vicious cycle

• Since its inception, Pakistan has spent more years inside an IMF programme than outside of it.
• Every leader took the money, imposed massive hardships on the population through austerity and demand suppression and then reneges on its commitment through a patchy implementation.
• Radical fanaticism and anti-India sentiments are successful tools of public appeasement.

Will Pakistan pursue macroeconomic reforms?

• In Pakistan, budgets have remained populist.
• The economic governance declined due to corruption, lack of financial institutions’ independence, and the export decline.
• The subsidies in the energy sector — fuel, oil and electricity — remain high to appease the public.
• With the present coalition government facing elections, they are less likely to take any further bold decisions.

Will “friendly countries” support Pakistan without preconditions?

• Saudi Arabia and China have been supporting Pakistan. MBS has already pulled his hands.
• Riyadh’s support is not unconditional.
• It can ask Pakistan “to return the money at any time if the two countries have divergent views regarding their relationship or ties with a third country, or some other issue.”
• China has been another significant source for Pakistan. Islamabad has been regularly seeking loans from China within and outside the CPEC projects.
• However, since the attack on Chinese citizens by Baloch Fighters, China appears to have been disgusted with Pakistan.
• CPEC is also at a standstill.

FATF clearance is no panacea

• During the latest Financial Action Task Force (FATF) meeting, there was an understanding that Pakistan has met its requirement.
• The FATF has agreed to explore the possibilities of removing Pakistan from the grey list.
• However, even when Pakistan was on the grey list, the IMF had been holding talks with Islamabad.
• The big two — China and Saudi Arabia — were not constrained by Pakistan’s listing in the FATF.
• So, the relaxation is less likely to open gates for big investments.

Will Pakistan go the Sri Lankan way?

• The situation was similar in Sri Lanka — the falling value of rupee, declining foreign exchange reserves, differences with the IMF, and rising fuel prices.
• All of them led to public protests in Sri Lanka against the government.
• The economic and energy crises in Pakistan have not snowballed into a political storm as it had happened in Sri Lanka.
• The dope of “threats to Religion” works effectively there.

Conclusion

• The experiment of Pakistan (as a separate nation) has failed on various fronts.
• To conclude, Pakistan’s economic and energy situation is serious and demands bold decisions.
• The situation will worsen in the short term before it gets better, but this has been Pakistan’s history in the last 75 years.
• With a relief from the IMF, after a protracted negotiation, a few band-aids, and the US intervention, Islamabad may muddle through this time as well, until the next crisis.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)