The IMF announcement of expansion of its multinational facility known as New Arrangement to Borrow (NAB) has baffled the world. The NAB is a credit arrangement between the IMF and a group of members and institutions to provide supplementary resources to IMF when these are needed to forestall and cope with an impairment of the global monetary system.
From its existing USD 50 billion size, its limit has been raised to USD 560.474 billion or SDR 333.5 billion. Thirteen new members will be joining the 26-member elite group. Of the total IMF's NAB facility, the US decided to raise its stakes to USD 105 billion from USD 10 billion or 20 percent of the facility. It would certainly enable the Fund to have access to adequate resources.
But with India joining the new participants list and deciding to contribute USD 13.33 billion in the pool is not a good news for Pakistan. It will enable India to have a meaningful say in IMF's future lending strategies. Our economy, which shows a high debt-to-GDP ratio could end up 65 percent at the end of the current fiscal year and with a perplex entry in SBP's Domestic Debt Head showing un-funded debt of Rs 1.396 trillion (USD 16.42bn), requires quick attention as the book is required to be accrued on an accrual-based accounting, which also means that the actual debt numbers are certainly much higher.
A lesson should be drawn from Greece that had been hiding the actual fiscal deficit numbers to comply with ECB target of capping deficit below 3 percent, but it was exposed at the time of its swap rollover due on maturity. Greece was forced to declare the real deficit figure that jumped to 12.9 percent, which also saw a highly significant surge in its debt-to-GDP ratio to 114 percent. Bulgaria was also encouraged to speak the truth, as it was also declaring incorrect fiscal deficit numbers and later it came up with new upward revised fiscal deficit figures.
As far as Pakistan is concerned, it has done nothing wrong, but if the donors ask for revalued un-funded numbers, debt-to-GDP ratio numbers could be up by another 9 percent, which has already reached an alarming proportion.
In March 2010, 13 East Asian countries met, and established a USD 120 billion-fund based on Chiang Mai Initiative (CMI) or a multilateral currency swap arrangement, which came into existence in Thailand in 2000. Japan and China are providing $38 billion each, and South Korea almost $20 billion. The Asean countries have collectively pledged $24 billion. They must have sensed that something is brewing across East Asia in particular.
For a reminder, in 2001, Argentina's debt-to-GDP ratio was 62 percent, but unlike Pakistan its currency was locked in currency regime and so is Greece which has been using Euro as its official currency since 2002. But Argentina's fiscal deficit was 1.7 percent of the GDP versus Greece's 12.9 percent. Pakistan is struggling to attain a fiscal deficit target of 5.1 percent set by the IMF.
There can be quite a few worrying questions. Where half a trillion dollar going to come from? What could be the impact on US dollar due to a jump in the size of SDR facility? Is this going to have an impact on gold and could we see a rush for this commodity? How would oil prices behave if there is a correlation coefficient between oil and US dollar? Why was this decision taken after accommodating Greece on soft terms, as economies of PIIGS countries are in trouble and already queuing up with demand for money?
Pakistan should not have any worry about how the US will provide this excess funding of USD 95 billion. Fed will either print notes or should be ready to provide Securities. It is important for the world to ascertain the real cause behind the expansion of IMF facility. If such a huge global debt continues to pile up, every borrowing country will be becoming fully dependent on the IMF. Hence, the need for a strategy on our part.
For the last 3 years Pakistan's economy has been struggling to make headways. Unfortunately, however, it has only deteriorated due to ailing domestic market conditions and rising commodity prices in the global market. Unfortunately, the bitter truth is that Pakistan's economy is more dependent on foreign borrowings and does not have a firm growth revival and revenue-generating plan in hand. So the most concerning factor should be that how Pakistan will repay loans to IMF and other debt at the time of maturity.
Watch out World! Something big is surly creeping up. Is it True that IMF prepares for Global Cataclysm? Participants and Amount of Credit Arrangements1/(in Millions of Special Drawing Rights)
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Current Credit New Credit
Arrangements Arrangements
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Current Participants
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Australia 801.29 4,370.41
Austria 407.57 3,579.24
Banco Central de Chile 340.00 1,360.00
Belgium 956.60 7,861.85
Canada 1,380.99 7,624.43
Danmarks Nationalbank 367.01 3,207.78
Deutsche Bundesbank 3,518.75 25,370.81
Finland 340.00 2,231.76
France 2,549.29 18,657.38
Hong Kong Monetary Authority 340.00 340.00
Italy 1,752.95 13,578.03
Japan 3,518.75 65,953.20
Korea 340.00 6,583.44
Kuwait 341.29 341.29
Luxembourg 340.00 970.59
Malaysia 340.00 340.00
Netherlands 1,301.85 9,043.72
Norway 378.88 3,870.94
Saudi Arabia 1,760.86 11,126.03
Singapore 340.00 1,276.52
Spain 664.77 6,702.18
Sveriges Riksbank 849.76 4,439.74
Swiss National Bank 1,540.26 10,905.42
Thailand 340.00 340.00
United Kingdom 2,549.29 18,657.38
United States 6,639.83 69,074.27
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New Participants
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Bank of Israel 500.00
Brazil 8,740.82
China 31,217.22
Cyprus 340.00
Greece 1,654.51
India 8,740.82
Ireland 1,885.52
Mexico 4,994.76
New Zealand 624.34
Philippines 340.00
Portugal 1,542.13
Russian Federation 8,740.82
South Africa 340.00
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Total3/ 367,467.36
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