Pakistan economy is growing at 5 percent plus growth, which comes at the cost of rising current account deficit. The dilemma economic managers face as to how smoothly fund the foreign funding gap without hurting growth momentum. Rising oil prices pose a great risk to external stability.
The usual modus operandi in past has been a knock on the IMF’s doors. This can happen fast this time if oil prices continue to rising. And seeing the worsening relationship with the US, the conditions the IMF could put on the table would be much more stringent.
A better strategy would be to preempt the crisis and take steps to avert it. Apparently, the authorities are working on it. The first choice is to look towards China for bailing us out. But how much can we rely on one country that has already committed $60 billion in infrastructure building. And what would be the modus operandi to seek Chinese funding if the SBP reserves fall below two months of imports?
One may naively suggest borrowing in RMB against the Chinese imports, as the mechanism is in place. (For details read ‘The new dollar?’ published on Jan 4, 2018). Yes, that is one way of diversification in the medium to long term, but this would not be the answer to solve current imbalances.
Chinese loans from government to government are at concessional rate of 2-2.5 percent; but private sector lending could be at much higher rates. And the new mechanism of borrowing in RMB of Chinese imports would be between private sector companies and banks, and the rates would be much higher than what we can afford for the balance of payment cushion.
Plus, you cannot put all your eggs in one basket. The relationship we have with Saudi Arabia and the USA was built over decades and to have similar support from China may take years, if not decades. Hence, if Pakistan is to place the eggs well - it will have to look beyond the all-weather friend as well. And that may essentially mean, looking back to Saudi Arabia and the USA.
It’s not just about the IMF or direct US support. Rather more important is the continuity of soft lending from the WB and the ADB. The decisions of support from these multilaterals take place in Washington and the continuity of support porgramme is contingent upon Pakistan’s lobbying efforts in Washington.
On the contrary, the Chinese influenced multilateral institutions are in infancy stage. Down the road, these lending agencies may replace the role of ADB for developing countries like Pakistan; but that seems distant today.
The other option for Pakistan is to look towards KSA for deferred oil payment facilities, which may become important in case of high oil prices. There are precedents of such arrangements in past; and that could be the case in 2018.
Having said that, the decisions may not be as easy this time around for different reasons. The Saudis are increasingly looking to bolster their own economy, while the Americans demand more, and the recent Trump tweet saga has not essentially helped either.
So Pakistan would do well to not act in haste and keep the options open. This may require a broader consensus among key foreign policymakers. The geopolitical strategic realities and the economy must not be divorced.