We certainly will face a serious balance of payments problems, whichever way the government handles it. The economy has slowed down. Although the government claims we’re going to have a 5-6% GDP growth rate.
But growth rates built upon the basis of financial sectors or the government sector are not as important. What really matters is agriculture and manufacturing. Agriculture has not been doing well lately.
Last year it had a negative growth rate. There are other concerns. We have a dollar gap and a rupee gap in terms of receipts and expenditures. Both are widening. The government is borrowing heavily in the domestic market.
These are rupee borrowings, which are not considered as large a problem as we can print rupees and not dollars but it will cause inflation if they print too many rupees.
But the concern for the people is that the economy is not moving towards a direction where it is creating jobs and I think for the government real concerns should be: what are the numbers and what the balance sheets show. I don’t see an immediate exchange rate crisis. People are talking about it because our reserves are touching the required bottom.
However, there are other avenues of financing that are open to the government that it can tap to cover the three-month import level. The real problem we will face is in December when a large repayment to the IMF is due. The borrowing the government will have to do will be fairly significant.
IMF vs Commercial loans
The government can do very heavy borrowing from the commercial market in order to not go to the IMF, but that means that future costs of servicing that debt will be very high. The government is stubbornly not allowing the rupee to depreciate which has hurt our exports.
So, the government can be stubborn, and say that we will never go to the IMF and keep borrowing from the commercial market at higher rates, which future governments will have to pay.
When we go back to the IMF they’re going to put very harsh conditions and I think the government will have to balance whether they want to accept those harsh conditions or they want to accept higher interest payments on commercial loans. This is a choice the government will have to make.
Dr. Kaiser Bengali has been an economic advisor to the governments of Baluchistan and Sindh. He has headed prestigious institutions like Social Policy and Development Center (SPDC), Karachi, and Sustainable Development Policy Institute (SDPI), Islamabad.