GDP and foreign aid shrinking, Pakistan economy crosses a line of control

Last week's cross-border skirmish has raised the stakes for PM Imran Khan to access foreign aid

The recent flare-up with India has possibly lengthened the odds against Pakistan to get the foreign aid that it needs immediately. The choices are, principally, two: From China or the International Monetary Fund (IMF). Of the total foreign loans Pakistan raised in 2017-18, more than 40 per cent came from these two sources. Islamabad also raises commercial loans of approximately the same amount from abroad. Foreign loans from both streams account for 30 per cent of the country’s GDP. 

Just after taking over as Prime Minister, Imran Khan had decided to reopen the deals his predecessor Nawaz Sharif had signed as part of the estimated $62 billion China-Pakistan Economic Corridor. The reopening has made China uncomfortable, because Khan seemed more eager to secure an IMF bailout. 

It will be a bailout, because rating agency S&P’s data shows the country has forex reserves to cover just one month’s import (the Pakistan finance ministry contests the data). In November, S&P has downgraded the long-term sovereign credit rating on Pakistan to B minus from B citing “diminished growth prospects, as well as elevated external and fiscal stresses” (the rank means the country’s finances are in a highly speculative grade). 

Last week as airports across Pakistan remained closed for more than a day amid other disruptions, the costs of lost exports, ticket sales and insurance costs could make those numbers could look even more perilous. The other data points are worse. While the Pakistan government estimates a nominal GDP growth rate for 2017-18 at 7.61 per cent, the rating agency’s calculations show that thanks to dipping exchange value of the Pakistan rupee the GDP measured in US dollars could actually shrink in 2019 and 2020 (see table).

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Such gyrations in statistics is one of the reasons the IMF has recently brought the country under a strict statistical publication system. A press note issued by the IMF in January this year said Pakistan has finally put in place the recommendations of the Enhanced General Data Dissemination System (e-GDDS) of publishing critical statistical data through the National Summary Data Page.

The last IMF annual surveillance of the Pakistan economy took place in June 2017, which is unusual since this is an annual mandate under the IMF charter. In fact, most countries baulk at even this annual ritual. But Pakistan has been in a different league altogether. In the past 30 years, the country has almost each year, needed more intensive check-ups by the IMF and the World Bank than the annual surveillance permits. Those check-ups are necessary for IMF to asses that the conditions surrounding the 12 bail-outs it has given to Pakistan, the most by any country in Asia, are operating satisfactorily. 

But despite such intensive scrutiny, Pakistan’s negotiations with the IMF since January 2019, to secure a 13th bailout have floundered, for two reasons. One is the worry that Pakistan could use the money to pay back some of the already contracted Chinese aid, which according to the country’s budget papers stands at $ 10.8 billion. “The external sector pressures are in part linked to the fiscal deterioration during the last fiscal year and an accommodative monetary policy stance, as well as the high imports related to the China-Pakistan Economic Corridor projects,” the executive board assessment has noted. In other words, give a guarantee that the IMF and Chinese loans would not be mixed up. As an aside, Pakistan raises loans from 27 nations.

The other is a push from IMF to Islamabad “to strengthen fiscal discipline through additional revenue measures and efforts to contain current expenditure while protecting pro--poor spending”. In other words, cut defence spending which accounts for over 20 per cent of the country’s annual budget (India spends about 11 per cent). The Pakistan army has taken out an insurance against their budget cut after last week’s developments.

Measures by the State Bank of Pakistan to address inflationary risks and help reverse external imbalances are also difficult, though the IMF has also asked for it. The foreign money imparts additional liquidity into the economy that keeps prices elevated. Since Pakistan has to raise 50 per cent of its external loans from the markets, it has to keep paying high interest rates to keep the lenders interested despite its speculative grade rating.

With foreign money terribly short, the country has begun to use innovative methods to raise forex reserves. Pakistan is one of the rare countries that has a ministry for sending labour abroad. The state guides them to “seek employment opportunities in international labour market including the Gulf countries” and maintains a data bank with the ministry of overseas Pakistanis and human resource Development of over 600,000 people for the purpose. The other strategy is to promote tobacco. A released issued by the Pakistan finance ministry this week notes that it has approved a proposal from Philip Morris Pakistan Ltd. for export and analysis of tobacco seeds. “The analysis report would help in production of good quality tobacco in future for domestic use and export purposes”. 

And the budget has introduced a lottery for overseas Pakistanis when they send in remittances. All remittances sent through legal channels qualify for a monthly lucky draws.