Impact of IMF Loan on Pakistan's Economy: In long-run and short-run

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Impact of IMF Loan on Pakistan’s Economy In long run and short run MAY 24 Authored by: Ayesha Majid 1 Impact of IMF Loan on Pakistan’s Economy IN LONG RUN AND SHORT RUN For decades, Pakistan has had chronic problems collecting tax and the program envisages reforms to improve public finances and cut public debt. However, failing to cope with these issues Pakistani government had to resort to taking loan. Hence under leadership of Prime Minister Imran Khan the government signed loan agreements with Saudi Arabia, United Arab Emirates, China & IMF. To keep the balance of payments in check and to meet the financial obligations government of Pakistan unfortunately always resort to take loans hence the government has now resorted to IMF. The primary purpose of taking loans from the IMF is that Pakistan’s Government wants to stabilize its Figure 1: Economy of Pakistan deteriorating economy, exchange rates and balance of payments, however this relief is short-term and usually yields a new crisis in long-term as the debt matures and the government gets into a 2 monetary crisis again due to inadequate raising of dollar in the federal reserve. IMF provides huge amount of loans for such purposes, which seems very lucrative and attractive offer at first sight for a short-term perspective. “Entering the programme was essential because it would allow you to raise money from the other avenues, It gives an assurance to all the other players in the market that now you can support Pakistan because it’s getting disciplinedSaad Bin Ahmed” (Hasan, 2019) Pakistan and IMF have signed 22 agreements for loans since 1958 comprising of 10 programs under PRGT (Poverty Reduction Growth Trust) and GRA (General Resource Account) of IMF and 12 bailouts. The current 39-month bailout plan has raised the figure by $6 billion and is the 13th time Pakistan has gone to IMF since 1980’s. A part of the bailout will be utilized to pay back policy loans from the World Bank and the Asian Development Bank. Figure 2: IMF Loans till date in SDR 3 This bailout has laid several conditions on the Pakistani government including those on taxes and subsidies, government spending, interest rate and foreign exchange rate but the most stringent condition laid by IMF for Pakistan was to account in detail the Chinese financial outlay in China Pakistan Economic Corridor and give firm assurances that Pakistan will not divert IMF loans to service its China debts. Pakistan needs $12 billion this year to bridge the gap between its foreign currency holdings and what is required to pay for loans and imports. The IMF wants us to raise our revenue income by Rs700 billion in the first year of the 39-month-long programme. The IMF will closely monitor the implementation of these reforms on a quarterly basis. In a situation of default in the implementation process, the IMF can stop the next tranche of the loan to Pakistan. This means that the promised $6 billion would not flow as a lump sum amount. It will be paid in several installments. (Ayaz, 2019) The State Bank of Pakistan (SBP) released data showed that the total debt and liabilities went up from Rs 25.109 trillion till June 2017 to Rs 29.861 trillion on June 30 2018 and Rs 35.094 trillion till end March 2019 , indicating that the total debt increased by Rs 4.752 trillion in last financial year 2017-18 and went up by Rs 5.2 trillion in first nine months of this fiscal year, showing 17.4% growth over the debt level of June 2018. Pakistan’s foreign exchange liabilities doubled to $10 billion by March, an Figure 3: Pakistan Total External Debt 4 addition of $5 billion since June 2018. The central bank’s deposit-related liabilities increased to $5.7 billion from $700 million. External Debt in Pakistan is expected to be 105000.00 USD Million by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. Looking forward, we estimate External Debt in Pakistan to stand at 115000.00 in 12 months’ time. In the long-term, the Pakistan Total External Debt is projected to trend around 123000.00 USD Million in 2020, according to our econometric models. (Trading Economics, 2019) The country owes debt to Paris Club ($11.3 billion), multilateral and other donors ($27 billion) and international bonds such as Eurobond and sukuk ($12 billion). In total foreign and domestic debt is predicted to rise to Rs2.1 or Rs2.2 trillion for the outgoing fiscal year ending on June 30, 2019. Meaning debt-to-GDP ratio galloping to 70%, and burdening every Pakistani citizen with $982. the finance ministry spends 36% of the total budget to service the public debt. “Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness, and a weak external position” Ernesto Ramirez Rigo, who led the I.M.F. mission to Pakistan (Amir, 2019) After IMF the biggest donor to Pakistan is China. An estimate is that around $19-20 billion out of $90 billion total debt and liabilities of Pakistan is Chinese i.e. over one fifth of the overall debt. Surpassing Japan to become the single biggest bilateral lender to Government of Pakistan. China also happens to be the biggest lender to the private sector as well. There is no direct number to reach the Chinese loan to Pakistan private sector; but virtually all the increase in the last three years has come from China. The total private sector external loan increased from $3 billion in Jun15 to $7.2 billion in Dec17. Pakistan will have to payback $100 billion to China by 2024 of total investment of $18.5 billion, which China has invested on account of bank loans in 19 early harvest projects, under CPEC. 5 Figure 4: Debt from China (BR Research, 2018) Although CPEC has the potential to transform the Pakistani economy, but experts fear this transformation could come at heavy price for Pakistan in light of what has happened in the past. Pakistan will have to payback $100 billion to China by 2024 of total investment of $18.5 billion, which China has invested on account of banks’ loan in 19 early harvest projects mostly relating to energy sector under CPEC. The interest on these loans will be around 7% per annum payable in 25 to 40 years. This means Pakistan would have to pay China roughly in between $7-8 billion as EM for the next 43 years from 2018 onwards. (Khan, 2017) According to Centre for Global Development, in 2011, Tajikistan wrote off an unknown amount of loan owed to China in exchange of 1,158 square kilometers of land. And this was only 5 percent of the land what was demanded by Chinese. Then in Sri Lanka, China did a debt to equity swap against $8 billion loan at 6 percent provided for construction of Hambantota Port against 99 years lease for managing port. Hence for Pakistan this loan could mean losing the Gwadar port to china but only time can tell what actually will happen will Pakistan be able to repay the loan or will it have to swap the loan for land or equity with China. Pakistan has been warned not to underestimate the economic risks from its China-funded building projects Chief economist Maurice Obstfeld says the debtridden country should carefully examine its dealings with China as it heads for another bailout. (Yu, 2018) 6 CPEC brought development and business avenues with it in Pakistan in exchange of the loan from Chinese government. In the same way IMF loan is expected to enable Pakistan to repay its maturing loans, boost its dollar reserve, acquire dollars to pay its import bill and cure the soaring economy from the money received. Possible measures include raising taxes, reducing energy subsidies and selling state companies, while the IMF is also in favor of a “market-determined” exchange rate. (Mangi, 2019) Due to the terms and condition of the loan Pakistan will see a new

 

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