In a briefing to the National Assembly Standing Committee on Finance on 19th December, 2017, SBP Governor, Tariq Bajwa revealed that there will be around dollar 12 billion (later revised to dollar 2.5 billion) financing gap in the external sector for the current fiscal year. He did not specify how this gap will be bridged but stated that there will be no issue as the country has foreign exchange reserves of dollar 14.5 billion. The Governor did not categorically rule out the possibility of going to capital market again but said that there is no immediate need of short-term commercial borrowings subsequent to capital market transactions of Euro and Sukuk bonds. Regarding the future value of the rupee against the greenback, Tariq Bajwa asserted that the market will determine the actual value of the rupee against dollar. He however, did not rule out the possibility of further depreciation of the rupee. "In our opinion we are near the equilibrium," he said. The rupee has lost its value by around 3 percent since July, 2017 and dropped by 5 percent now. The Secretary Finance informed the meeting that Pakistan is required to repay dollar 5.9 billion external debt servicing and principal amount in the current fiscal year and a payment of dollar 2.4 billion has already been made during July-November, 2017. The Committee decided to hold a detailed briefing by the Finance Minister, EAD and the SBP on loans and financing requirements of the country in the next meeting.
In our view, it was very wise on the part of the Committee to have a detailed briefing by the three relevant departments again because the relevant government departments, including the present management of the SBP usually, paint a rosy picture of economy. As such, their assessment needs to be fully reviewed and scrutinised. In the instant case, Dr Hafiz Pasha, a renowned economist and former Finance Minister of the country, while speaking at a seminar organised by the German Institute, Friedrich-Ebert-Stiftung, warned that the government will run out of foreign currency reserves which will trigger a financial crisis. According to his forecast, Pakistan's external financing needs will be dollar 32 billion for the next 18 months, of which only dollar 8 billion will come through the CPEC and FDI whereas the government will have to resort to borrowings to cover the rest. The real challenge would emerge after departure of the caretaker government. "By that time, cracks will widen and foreign currency reserves will fall below dollar 3 billion," according to him. The only way then would be another bailout from the IMF that will not be a joyride to Pakistan due to change in the US policy stance towards Pakistan.
Although Dr Pasha's prognosis is much more pessimistic than the SBP Governor, there is absolutely no doubt that Pakistan is in an incipient external sector crisis which, unlike the previous ones, may prolong and the IMF may not be as generous as in the past. In all likelihood, the government will run out of foreign currency reserves in less than a year's time, triggering a crisis. The country has already been facing difficulties in managing its external account due partly to mounting foreign debt repayments and a widening current account deficit. The government's response to the unfolding crisis is both slow and inadequate. It has recently imposed a regulatory duty on certain kinds of imports, offered PM's export package and lately devalued the currency by only 5 percent and that too probably under the IMF pressure. Such half-hearted measures may release some pressure on the external sector but are no answer to the enormity of challenge. It is clear that the government, instead of undertaking the needed reforms, is conducting a 'holding operation' that, according to Dr Pasha, is aimed at keeping foreign currency reserves at a level that will allow it to defer the issue till June next year. The only way after the elections and for the new government then would be another bailout from the IMF. This is indeed a crunch time and the government must initiate the needed structural reforms. Otherwise, the situation could go from bad to worse. Ad hocism could delay the problem for a few months more but cannot resolve the real issue in the medium to long-term. Also, the government needs to tell the truth as there is a vast difference between the estimates of the financing gap made by the SBP and Dr Pasha. This has given reason to Dr Pasha to say that "over the past four and half years, the government has pursued a path of presenting unrealistic statistics. Indicators like debt-to-GDP ratio, inflation and economic growth are manipulated. The problem is that the government has started believing in its own manufactured data." The government needs to dispel such an impression in order to restore the credibility of official statistics.
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