Something Imran is good at - apart from cricket, is in raising money. He demonstrated it as a social worker, and now he is doing it as Pakistan’s leader. The first step was the hardest to take and the government has successfully secured a cushion of $6 billion from Saudi Arabia.
PTI top leadership has been consistently emphasizing on exploring all the options of friendly countries before entering into an IMF programme. And now their words are becoming reality. Imran Khan has established his credibility after securing funds from KSA; and this can go a long way in getting positive response from other friendly countries.
Back in PPP’s term, there was a forum of friends of democratic Pakistan (FoDP); but not a single penny was raised. The government at that time lacked credibility is committing much needed economic reforms and hence got nothing. During PMLN’s time, some of the credibility was restored, and the country got a gift of $1.5 billion from KSA and game changing CPEC was also signed.
Now the current government seems to be on a better trajectory. Never in the history of Pakistan KSA has given such a big sum of money in one go. This includes $3 billion deposit for balance of payment support for one year and $3 billion one-year deferred oil facility to be extended for 3 years.
The next visit of country’s leadership is Malaysia, by the end of this month, where the expectations are to get some deferred palm oil payment facility; a surprise element could come in the form of cash support. Pakistan imported $1.9 billion of palm oil in FY18; and its share its skewed towards Indonesia (85%), while in past the share of Malaysia was higher (90% till FY13). The Malaysians are finding it hard to compete with Indonesia in global palm oil market and it might make sense for them to negotiate deferred payment facility in quest to regain Pakistani market.
Another important visit is that of China, in the start of November, where some cushion for balance of payment is very much on the cards. However, after getting support from KSA and hopefully Malaysia, the government’s focus should be on improving trade balance with China. Pakistan’s trade deficit with China is around $14 billion and is the main reason for hike in non-essential imports.
Pakistan needs to renegotiate the FTA with China and should sync it with the second round of CPEC - in special economic zones; the need is to manufacture goods that we today import from China by having JVs of local businesses with the Chinese. The idea is to opt for import substitution and possible exports in future, after moving up on the learning curve.
In the next two weeks, the results of Malaysian and Chinese visits will surface. Right now the situation is that the SBP reserves will jack up by $3 billion in a go, and the deferred oil facility will be give another $3 billion cushion in 12 months’ time, which will remain available for 36 months from now.
This has eased a lot of pressure that the government has been facing; and if they collectively get $5 billion support one way or the other from Malaysia and China, the pressing need to enter into an IMF programme will vanish as the total financing gap is estimated to be around $10-12 billion mark.
Having said that, government should take the IMF programme seriously for two reasons. One for creating additional buffer of foreign exchange reserves, and other to fetch funds from multilaterals and to have better pricing for issuing bonds in the international market.
The fine point is that the government, after securing KSA funding, is no more desperate in front of other friendly countries, IMF and the US. In November, when the IMF team will come to negotiate, Pakistan will have the negotiation power.
Most of the economic reforms the Fund may ask for are already in process of implementation. The government has taken steps to curtail the twin deficit problems and the result is already yielding in 1QFY19 numbers.
IMF’s prime concern is to stop the fiscal hemorrhage; and the government is already on it. Yes, IMF may ask for privatisation of SOEs; but the PTI government would have the negotiation power to convince on its plan of reforming the entities, which is politically even more difficult.
The only bone of contention could be on altering the fiscal federalism structure where after 7th NFC award, provincial governments are getting higher share of revenues. It’s hard to curtail fiscal deficit without either creating a contingency fund for federal government prior to the divisible pool or passing on part of the debt burden to the provinces. It’s a hard task politically, and now PTI can negotiate on that front too with the Fund.
Some circles fear that there might be non-financial conditions that the US may demand on IMF’s platform - such conditions do not come on paper; and hypothetically if at some stage country’s sovereignty is challenged, the government can refuse the IMF loan.
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