The balance of payment situation is getting precarious day by day. The SBP reserves were at $13 billion at the end of January and are falling at a rate of $200-250 million per month for the last few weeks. Seeing this, the critical number of $10 billion can well reach within the current government’s remaining tenure.
How to avert a looming crisis? A few circles are now advocating an IMF Stand By facility, which could give a short term relief as an influx of say $6-7 billion by IMF-SBA can offer a lifeline for a year or so to do reforms; and if the situation does not improve this could lead to a full-fledged IMF programme.
Will the government get into an SBA with a few months left to elections? The SBA usually comes with frontloaded conditions and they are normally tougher than the long term programme. Will the PMLN government depreciate currency substantially, increase interest rates significantly, revise up electricity and gas tariffs or cut down public sector development spending just before the elections?
The government would surely not like any tough reforms just before elections as these elude their chances to win. Hence, entering into an IMF-SBA might be the last option, unless they miraculously negotiate on less frontloaded conditions.
What element can soften the IMF stance which may result in either the Fund giving a soft SBA or soften the post programme report which is under the final negotiation round? Well, it is politics that can change the heart of the IMF. The Fund had a softened stance in its last programme which was openly criticized by leading economists in the country.
Why the stance was soft and can it be repeated this time? The strongest presence on IMF’s board is USA; and any change in IMF writing can be triggered by diplomacy in Washington. The US was an ally to Pakistan, couple of years ago based on the military partnership. The ‘do more’ mantra was operative; but now, in Trump administration, the stance is changing.
The only way the US can put a blind eye on economic challenges Pakistan is facing is only if Pakistan military operations become in line with the US objective. It is not the doctor’s order for PMLN to submit to establishment so close to elections. The government, in a nutshell, seems trapped. And it’s important to note that, even if Pakistan military and civil authorities are on the same as the US military agenda, the IMF may continue with a harsh stance.
However, government has to do something as even without the SBA, post programme monitoring report language is of utmost importance for continuation of flows from WB group, ADB and others. And without these flows, it is hard to even survive till elections.
Thus, government may find a midway by taking some tough actions such as further currency depreciation and monetary tightening in coming few weeks for the IMF to tone down its language. What else does the government have in the kitty?
Well, China can come with some more loans or other form of balance of payment support. Had China not given $4-5 billion in FY17, Pakistan would have already been in the Fund programme. Now some help from China, and another round of Euro bond/Sukuk issue, can take this government home.
But for how long? The IMF would become inevitable in 2019. Mind you, this rosy scenario, as in worst case, the alarm bells can start ringing within few months. Lets us visualize what would happen once we enter into the fund programme without delving into the exact timings.
The fund would ask for currency adjustment, monetary tightening and fiscal austerity. Everyone around is talking about the first two measures and already some tightening steps have taken; but nothing so far on the fiscal austerity. What does this would imply?
The government has to cut down on public sector development, a contingency fund to undo higher spending by provinces after 7th NFC award, and revision in energy prices to cut down energy related subsidies. By doing so, the growth momentum may hurt as government spending is biggest source of cement and steel related growth.
And in case of energy; all the PMLN government has done is enhancing the power generation capacity. Now the capacity is enough to eliminate the load shedding this summer and in summers to come. However, without T&D reforms, government has to provide subsidy for losses or tariffs have to be revised upwards.
That is half the issue; the other element is that 5000-6000MW coming in from 3 RLNG and 2 coal plants are accompanied with capacity charges. Right now, all the RLNG plants are in test run, in a few months, after their commissioning, capacity payment would start. And these are in addition to capacity payments of all the older plants.
The tariffs have to be revised up to accommodate new capacity payments irrespective of fuel savings. In summers peak demand amid high oil prices, government may opt for less power production to save import of fuel. It did this back in FY10-13 and this may start again. Well, this would mean higher tariff and higher load shedding.
That looks scary. It would take Pakistan back to where the PMLN started in 2013. The need is to cut down extra fiscal spending today, revise up power and gas tariffs apart from monetary tightening and exchange rate adjustment. Plus, the military relationship with US ought to be less stiff to do back door diplomacy with IMF.
It is tough today; but it can get tougher tomorrow.
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