Pakistan’s Prime Minister and central bank say the nation can weather the strain of its widening external deficits and shrinking foreign-exchange reserves.
Those stresses have fueled speculation Pakistan may need support, with Karachi-based Dawn newspaper in July running a story headlined “Are we heading towards the next IMF program?” while the Economist Intelligence Unit released a report on Nov. 2 titled “Will Pakistan go to the IMF again?”
The World Bank estimated in October that $17 billion of external financing — or 5 percent to 6 percent of gross domestic product — is needed in the current financial year through June for Pakistan to bridge its debt payments and current account deficit. Rising imports on the back of China’s “Belt and Road” infrastructure push have helped fuel the imbalance as the current account deficit more than doubled to $14.4 billion in the year through September.
Despite the strains, authorities have dismissed suggestions the country will request financial support from the International Monetary Fund or China.
“We don’t see the reason for seeking any support at this stage — based on our own analysis we feel the economy will be able to cater to the needs of foreign exchange and external side requirements,” State Bank of Pakistan Deputy Governor Jameel Ahmad said in an interview in Karachi last week. “I can’t say for the future what will happen, but currently we don’t see any need for that.”
Ahmad pointed to rising exports in the quarter through September as a sign things had “bottomed out.”
Prime Minister Shahid Khaqan Abbasi said in an August interview that Pakistan won’t seek another IMF package and is poised to introduce “radical” tax reforms in a country where less than 1 percent of its more than 200 million people file income returns. Abbasi in a text message to Bloomberg this month reiterated that “all our debt repayments are being managed and we do not see a need to go to the IMF.”
Yet with national elections scheduled for August next year, such a move may be untenable. A bailout so soon after the last $6.6 billion IMF loan program, completed in September 2016 and taken soon after the current government was elected in 2013 to stave off a balance-of-payments crisis, is politically unpalatable and unlikely before the 2018 vote, according to Gareth Leather, senior Asia economist at Capital Economics Ltd. in London.
“The IMF is very unpopular and the government still has a few options,” Leather said. “It could continue to run down its foreign-exchange reserves, it could allow the currency to weaken, or it could seek money from elsewhere, most likely China.”
South Asia’s second-largest economy has been here before and has taken 12 IMF loans since 1988.
“Pakistan’s history is filled with this,” said Uzair Younus, a South Asia analyst at Washington-based consultancy Albright Stonebridge Group LLC. “The economy booms and everyone wakes up and says we need more money. There are no more dollars and we go into a balance of payment crisis and then the IMF has to step in. I think we are going towards that, but we are not there yet.”
Also voicing concern over Pakistan’s “sky-high debt” last month was the powerful army chief, General Qamar Javed Bajwa, who at a conference in Karachi called for a broadening of the tax base and financial discipline. Such comments raised eyebrows in a country where the military has staged multiple coups, some when the armed forces blamed the civilian government for mismanaging the economy.
A political crisis hasn’t helped. Finance Minister Ishaq Dar, along with former Prime Minister Nawaz Sharif, faces corruption charges. Sharif, who continues to head the ruling party, was barred from office by the Supreme Court in July after a probe into his family’s finances. Dar and Sharif have denied any wrong-doing.
Saeed Javed, a finance ministry spokesman, didn’t answer calls or text messages seeking comment. Dar has consistently said Pakistan won’t need IMF support.
Last week, Pakistan was named by S&P Global Ratings as one of the “fragile five” countries, along with Turkey, Argentina, Egypt, and Qatar, that are seen as most vulnerable to a normalization in global monetary conditions.
Foreign-exchange reserves have fallen 15 percent to $19.8 billion this year, while external debt and liabilities have risen 31 percent in two years to 8.7 trillion rupees ($83 billion) in June, according to central bank data. The government is seeking as much as $2 billion from an international debt sale this year, according to people familiar with the matter.
“The government’s financing needs are growing aggressively,”’ said Stephen Bailey-Smith, an investment strategist at Denmark-based Global Evolution Fonds A/S. Those needs “are unlikely to slow prior to next year’s elections.”