Home Global Village Shunning IMF for Sukkuk is politics at play

Shunning IMF for Sukkuk is politics at play

Sukkuk
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Waqas Shabbir |

The growing twin deficit is taking a toll on Pakistan’s over-stretched finances. The struggling treasury is desperate to secure funds to avoid any unreasonable and dire circumstances, which could lead to full-blown financial disaster. The decision to choose the right option can have long-term repercussions for the sustainability of the country. Pakistan in one way or another remained in a fragile state for significant portions of its existence. 

Pakistan has faced acute and chronic issues like weak/stagnant exports, conversion of grants and trades into loans, continuous shortfall in savings, external shocks, decline in flow of economic assistance, and hardening terms of loan on commercial and non-commercial terms, trade deficits, negative current account balances, no liberal incentives to attract foreign direct investment (FDI), imprudent use of loans, decline in foreign exchange rates, changing nature of grants, and loss bearing public enterprises.

Pakistan’s failure to drive growth and development with borrowed funds internally and externally has failed to improve the conditions of the country and its masses.

Moreover, the harsh austerity measures imposed by the IMF and failure to pay the accumulated loans due to ineffective economic policies led to liquidity crises at regular intervals. The persistence of long-term problems became an impediment to the sustainable growth of the country.

Now yet again, despite all the slogan of economic ascendance, Pakistan requires external borrowing. However, the government is adamant to avoid IMF and launch another international bond in about 45 days’ time.

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Interestingly Pakistan has decided to say no to IMF loans. Since the problems are the same, the remedy is same. IMF appreciated Pakistan’s decision to depreciate the rupee, despite the fact that the rupee had witnessed a decline in value over the course of history and depreciation failed to transform the fortunes of the country. Because, failure to implement structural reforms, and lack of competitiveness, energy crises, and continuous political instability augmented the problems.

IMF is right to point out that considerable efforts to contain energy crises and improve the infrastructure development may prove instrumental in averting the crises.

Pakistan must not indulge in indiscipline and must have to adhere to the austerity measures devised by the IMF [as we still owe them] to ensure fiscal discipline and tight monetary policy.

The government is aware of approaching general elections. Going to the IMF will make a grand statement. Last year, the experienced democratic champions, in their election campaign pledged to dissolve foreign debt. But, in fact, went on to a record borrowing spree resulting in a hike in debt to GDP ratio to 68.1%. Shahbaz Rana reported that Pakistan would require approximately $20-25 billion in the current fiscal year to meet its external needs which contradicts the figure of $18 billion quoted by the ministry of finance.

To meet its demands, Pakistan issued $1.0 billion five-year Sukuk and $1.5 billion ten year Eurobonds transactions at a profit rate of 5.625% and 6.875% respectively. Government is planning to raise more funds in a month and a half, which apparently looks like a political decision to avert IMF for now to avoid public pressure for the time being. Shunning IMF for Sukkuk is politics at play.

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The government expects exports to rise and imports to decline after adopting control measures to avoid any extreme outcome compelling to knock at IMF’s door.

Though IMF has shown partial satisfaction with current trends in remittances, FDI and exports in this fiscal year but growing trade deficit remains a massive threat to Pakistan’s ability to sustain without IMF’s support until June 2018. 

The plan is simple to avoid the IMF clutches until the 2018 general elections.

Though IMF has shown partial satisfaction with current trends in remittances, FDI and exports in this fiscal year but growing trade deficit remains a massive threat to Pakistan’s ability to sustain without IMF’s support until June 2018. 

In the last IMF program, the directors stressed the importance of further reducing public debt to more sustainable levels, while preserving room for higher spending on critical infrastructure, educational, and social programs. It is critical because, it was witnessed in case of Greece and Italy, whenever fiscal discipline is the order in the wake of huge borrowing, it suppresses the wages, salaries, employment opportunities, social and fringe benefits resulting in further damaging the effective demand of the country.

Pakistan must not indulge in indiscipline and must have to adhere to the austerity measures (as always) devised by the IMF [as we still owe them] to ensure fiscal discipline and tight monetary policy. The impact of such harsh measures is also debatable and controversial.

Going forward, ideally, Pakistan must use, its external debt in asset building but it has been using the more significant chunk of its loans on repayment of existing debt. Had these loans utilized in the asset building, it would be beneficial, but they failed thus far to enhance the source of earnings.

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The decision to choose the right option can have long-term repercussions for the sustainability of the country. Pakistan in one way or another remained in a fragile state for significant portions of its existence. 

The statement issued by the ministry of finance yesterday is similar to its previous hallow commitments. Ministry of finance had committed in the last economy survey of Pakistan, and in the report on the state of the economy in October 2017 to strengthen the fiscal position and lowering public debt.  But, it did the reverse of this.

Pakistan’s failure to drive growth and development with borrowed funds internally and externally has failed to improve the conditions of the country and its masses.

History tells us that depreciating the rupee has never worked wonders for the Pakistani economy unless the bulk of the revenue generated are not allocated for infrastructure and inclusive development, the underutilization of loans on asset building will further deteriorate the precarious debt position.


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