The editorial board
Transparency is needed on loans from China, UAE and Saudi Arabia
The editorial board
A 12th IMF bailout since 1980 sums up decades of economic mismanagement in Pakistan. Chronic under-investment has left the country with a limited export base to support growth, while failure to improve tax collection has pushed public debt to elevated levels. The latest IMF bailout package requires economic adjustment not too dissimilar to the past. But with debt levels now much higher and bilateral loans taking on an important role in the country’s rescue, the IMF must ensure its lending standards remain strict.
Safeguarding economic stability in the vast, nuclear-armed and strategically important country of 212m is no small matter. An IMF programme will at least help in that goal, and limit the country’s growing overdependence on China. With economic growth already set to slow sharply this year, the adjustment will be unpopular. But it could give former cricketer Imran Khan’s ruling Tehreek-e-Insaf (PTI) party a chance to deliver on at least some of its election promises to help the poor and boost investment.
At $6bn, the IMF package agreed in principle this week in itself looks puny. It is around half the amount economists estimate Pakistan needs to plug its external shortfall. It is smaller than the 2013 bailout, though the current account deficit has increased by a factor of four in US dollar terms, external debt has ballooned and foreign exchange reserves are depleted.
The $7.2bn pledged by China, the United Arab Emirates and Saudi Arabia since Mr Khan came to power last August explains the shortfall. Confirmation of these loans is needed for the IMF’s executive board to approve its funding. Diversifying its financing may have allowed Pakistan to reduce its reliance on the IMF, but does not reduce the need to adhere to its targets.
A stronger economy with a more dynamic private sector will benefit all creditors. The seal of approval from an IMF programme will facilitate a quicker return to market-based financing and a lowering of financing costs. Strict IMF targets should also ensure the country has sufficient capacity to repay, and help allay concerns in Washington over the fund’s financing being used to repay Chinese creditors.
The IMF will also need full transparency on the currently opaque terms of Pakistan’s bilateral loans, and the repayments due after Beijing invested $62bn in the China-Pakistan Economic Corridor, part of Chinese president Xi Jinping’s Belt and Road Initiative. Although Pakistan has argued it has a “serious debt problem, but not a China debt problem”, the feasibility of repaying an investment equivalent to one-fifth of Pakistan’s gross domestic product is questionable. China’s recent announcement that it will take account of countries’ capacity to repay BRI debt may have allayed some IMF concerns. But for now this remains nothing more than a pledge from Beijing with no concrete action.
The IMF agreement is targeting a fiscal deficit excluding interest payments of 0.6 per cent of GDP in the 2019-20 budget which, if achieved, would bring the deficit back in line with the outcome during the last programme.
The required subsidy cuts and reform of ailing state-owned enterprises will be unpopular and, alongside exchange rate liberalisation, will push inflation higher and hurt living standards in the short term. But if it complies with the targets, Pakistan will have an opportunity to finally reform its economy.
Mr Khan has pledged this will be the last time that Pakistan turns to the IMF. This seems unlikely, given the record, but even partial implementation will help avert economic turbulence in the heart of a troubled region.
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