Pakistan is grappling with a big economic crisis. The State Bank of Pakistan has only about $10 billion of foreign exchange reserves, enough to fund two months imports. Pakistan runs a serious risk of defaulting on its payments. The situation poses a challenge to Pakistan’s prime minister-elect Imran Khan who will be sworn in today, August 18, 2018.
In April 2018, India's foreign exchange reserves had hit a life-time high of $425 billion. Things have changed since then. The forex reserves have been falling by about $2 billion a week for seven weeks and present balance is under $400 billion. But government maintain that there's no reason to panic. Falling reserves are a result of RBI's intervention to arrest the slide of the rupee, which has depreciated around 8% in this year (16% in the past 2 years). Rupee slide against USD is the worst among the Asian currencies. No amount of reserves is ever adequate. China's reserves also fell by $14 billion in one month to $3,111 billion. Rupee is expected to remain under pressure in the near future due to rising oil prices, global trade wars, tightening of global liquidity and a strong dollar. On Aug 17, 2018 USD/INR touched 70-mark and likely to touch the 72-mark soon.
- Pakistan's current account deficit has grown four times in just two years. It touched $18 billion in FY18, up 42.5% over the previous fiscal year. Two years ago, it was at $4.876 billion, rising to $12.621 billion the following year.
- The import bill ballooned mainly due to higher oil prices and imports from China which is building several infrastructure projects in Pakistan under the China-Pakistan Economic Corridor programme.
- There was a marginal increase in exports which are mainly textiles. Pakistan has devalued its rupee four times since December with an aim to make its exports cheaper.
- The previous Nawaz Sharif government failed to take advantage of low oil prices to build foreign reserves. Corrupt regimes, faulty economic policies and low tax revenues have brought Pakistani economy to the brink.
- But the only option visible to Pakistan is to go for IMF loan. Pakistan has borrowed from IMF several times since 1980. Though the total financing gap for the current fiscal is at around $12 billion, Pakistan may not get more than $9 billion from IMF according to its maximum quota. For the IMF bailout, it needs support of several countries, including the US which has warned the IMF against helping Pakistan as the country could use the IMF money to repay its China debt.
- Even if IMF extends help to Pakistan, it will come with conditions like devaluation of the currency, disinvestment in loss-making PSUs, hiking electricity rates and cutting agricultural subsidies which will jeopardise Imran Khan's new government as well as hit economic growth.
- Imran Khan has announced that he would run an "Islamic welfare state" hinting at higher public spending. So far, IMF has not made any promise to bail out Pakistan, nor has Pakistan asked for a bailout.
- Pakistan can also seek Saudi Arabia's help, which can only defer oil payments.
- Pakistan can borrow from its all-weather friend China which would mean a higher debt burden. Chinese debt is already a worry for Pakistan. China has lent Pakistan $1 billion in June and total lending to Pakistan in this fiscal year exceeded $5 billion.
The new Imran Khan government faces a tough task of turning around the economy. Khan needs to bring in economic reforms, restrict government spending and imports, try to increase tax revenues and increase exports.
In April 2018, India's foreign exchange reserves had hit a life-time high of $425 billion. Things have changed since then. The forex reserves have been falling by about $2 billion a week for seven weeks and present balance is under $400 billion. But government maintain that there's no reason to panic. Falling reserves are a result of RBI's intervention to arrest the slide of the rupee, which has depreciated around 8% in this year (16% in the past 2 years). Rupee slide against USD is the worst among the Asian currencies. No amount of reserves is ever adequate. China's reserves also fell by $14 billion in one month to $3,111 billion. Rupee is expected to remain under pressure in the near future due to rising oil prices, global trade wars, tightening of global liquidity and a strong dollar. On Aug 17, 2018 USD/INR touched 70-mark and likely to touch the 72-mark soon.
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