Pakistan has a long history of signing IMF programmes to address its balance of payment crises and structural economic imbalances. There is much talk about imitating the IMF recipe practised in Egypt recently to address Pakistan’s lingering balance of payment crises and other structural adjustments issues. So, there is a need to compare and analyse the macroeconomic indicators of both the countries, and to gauge the outcomein our case.
Egypt, in 2016, sought a three-year loan worthUS$12 billion under the Extended Fund Facility. The Central Bank of Egypt freely floated the exchange rate after entering the programme with the IMF, which raised the value of US dollar against Egyptian pound, approximately more than 90 percent immediately. This massive depreciation of currency along with removal of subsidies on energy raised the headline inflation to 33 percent. Egypt was experiencing the fiscal deficit of 12.5 percent of the GDP, and the current account deficit was approximately US$ 14.5billion in 2016-17.The interest rate touched peak of 19.25 percent in July 2017.
A slight improvement in current account deficit is observed that can be attributed to precipitous decline in currency value, which resulted in enhancement of foreign remittances, and boosted tourism, but the trade deficit is barely perceptible to notice. The fiscal deficit of Egypt is still more than 8.5 percent of the GDP, and the debt level has increased more than 150 percent during the IMF programme. Its foreign exchange reserves increased from US$ 26 billion to 42.5 billion on the account of phasing out capital controls.
After the latest spell of growth, rising fiscal and trade deficits are now forcing the government to cool the demand for imports and implement austerity measures
In the case of Pakistan, the situation is not as grave as Egypt was passing through. Pakistan holds international reserves of approximately US$ 10.3billion, the current account deficit is more than four percent of the GDP, the fiscal deficit is 7.2 percent, and short-term liabilities are US$ 14.74. The trade deficit from July 2018 to March 31, 2019 is US$ 23.6 billion. In Pakistan, the Real Effective Exchange Rate (REER) is approximately around 100, whereas in Egypt, REER was130, and dropped immediately to 80. It is anticipated that REER would touch 80 to 85 in the case of Pakistan, which will translate the rupee value against US dollar around 165 to 175, as the SBP is moderately allowing upward adjustment in dollar exchange rate after switching to floating exchange rate regime. The devaluation of rupee will trigger another round of inflation (CPI 10 to 12), which will force policy rate to touch 15 percent as it is already 13.25%.
Pakistan’s economic malaise stems from its dependence on imports. The country lacks a competitive export basket of higher value-added items, with cotton products, leather and rice accounting for 69 percent of exports. In the other direction, Pakistan imports large quantities of machinery, electronics, metals and oil, its most expensive import; all of that together account for half of Pakistan’s US$60 billion in annual imports. As a result, Pakistan has run a persistent trade deficit, which totalled US$36 billion in 2018.
The current IMF programme will enable Pakistan to generate three to four billion dollars through dollar bond. There is expectation to raise funds through carry trade in debt securities. A similar phenomenon was observed in Egypt where the country received US$ 20 billion in inflows in local debt from foreign investors. With the IMF programme funds, US$ 5-6 billion from the Asian Development Bank and the World Bank will flow to add international reserves. In the last IMF programme, Pakistan raised a total US$ 2.5 billion in Euro bonds.
The IMF conditionality is always severe and hard to adjust; therefore, Pakistan has a long history of early exits from most of the IMF programmes. Like earlier programmes, the condition of the latest IMF programme are: to reduce budget deficit by increasing indirect taxes; raising utility tariff; decreasing the losses of State Operating Enterprises (SOEs) by aggressive privatisation, and eliminating tax exemptions, including the most critical conditionality of floating exchange rate regime has been phased. It is expected to put tremendous pressure on Pak rupee-US dollar parity, and will push rupee value against US$ to 165 to 175 at the end of this fiscal year.
There is a sharp hue and cry in the electronic and social media about the dwindling Pakistani currency, the decline of the Pakistan Stock Exchange, and weak administrative controls, which are causing un-warranted price hikes, hoarding of stocks and frustration among masses. The political milieu is also not encouraging. Opposition parties are joining hands to give a tough time to the government, which will in turn stagnate the economy and deepen the crisis. How to ease out the situation for the common man, the answer is not an easy one.
The present government in a bid to reduce the fiscal deficit curtailed development spending, raised tariff and non-tariff barriers to suppress imports and control balance of payment crises, introduced conditions of filers for real estate transactions and automobile purchases, and investigate bank accounts. This is the domestic situation. Internationally, FATF negotiations and CPEC ramifications start surfacing. All this has led to economic slowdown and breeding of distrust among various stakeholders of the economy.
Pakistan’s economy is characterised by frequent boom-and-bust cycles. After the latest spell of growth, rising fiscal and trade deficits are now forcing the government to cool the demand for imports and implement austerity measures. Implementing these measures will slow growth, creating opportunities for the political opposition.
The writer is a freelancer