Pakistan’s Prime Minister Imran Khan, has engaged foreign economists in the newly formed economic advisory panel to deal with the current economic crisis. Pakistan reportedly has foreign reserves just over $10 billion sufficient to cater to imports for 2 months. The current account deficit stands at $18 billion and external debts and liabilities stand at a record $91.8 billion. Pakistan’s import bill has shot up owing to the rising oil prices and also the lack of remittances and sluggish exports.
FATF Grey List
Pakistan is currently on the grey list of the Financial Action Task Force (FATF). Insufficient efforts to curb terror financing and money laundering could lead Pakistan to FATF ‘black list’ adding to Pakistan’s economic woes. Currently, two countries which are on the FATF black list are Iran and North Korea. FATA black list would have severe financial implications for Pakistan including: increased scrutiny, increased transaction cost, longer transaction time and costly loans. The Asia Pacific Group (APG) of FATF visited Pakistan recently and raised serious concerns including the funding of UN designated organisations and terrorists. It is interesting to note that despite FATF earlier warnings and being placed on the grey list in June this year, Hafiz Saeed’s party Allah-O- Akbar Tehreek (AAT) fought the 2018 general elections in July.
Much Needed IMF Bailout
Pakistan needs a substantial infusion of economic assistance to avoid a financial breakdown and is looking at various options as a reliever for its economic woes. The most desirable option is the International Monetary Fund (IMF) bailout. IMF has in the past given 12 bailouts to Pakistan. The Trump administration has adopted a strict posture towards Pakistan, drastically reducing financial and security assistance to Pakistan. US Secretary of State, Mike Pompeo, recently made a statement that the IMF bailout cannot be used by Pakistan to repay ‘Chinese debt’. The IMF bailout for Pakistan will come with strict conditions and austerity measures such as a tax hike, spending cuts, requirement of greater transparency in financial dealings (including CPEC) and demand of structural reforms. Although meeting the IMF conditions will be a challenge for Pakistan but the nation should gain in the longer run as the IMF bailout adds to the credibility of the nation and would open doors for lending/assistance from other international financial institutions, like the World Bank and the Asian Development Bank. For New Delhi, it’s better that Pakistan gets an IMF bailout as it would require more transparency and openness from Pakistan. Also, IMF lending makes Pakistan accountable on the international platform.
Pakistan’s All Weather Friend China
Pakistan will be looking at China, and there have been reports of Beijing offering a reliever to Pakistan. Pakistan has already received around $5billlion from China in a mix of bilateral and commercial loans during the latest fiscal year. In case Pakistan fails to get an IMF bailout, it is quite probable that Beijing will come as a savior in some form. Additional debt from Beijing at this point of time would add to the existing debt burden for Pakistan. Islamabad needs to be careful if it decides to go for Chinese loans, given what happened in Sri Lanka, where the government was compelled to handover Hambantota port to the Chinese due to its inability to service the Chinese debt. Also, the Chinese loans are unlikely to come without conditions. For the international community, Chinese financial assistance to Pakistan would mean little transparency.
Timely Assistance from Saudi Arabia
The Islamic Development Bank (IDB), a Saudi backed financial institution, has reportedly agreed to extend $ 4 billion to Pakistan. The Saudi money is restricted to financing Pakistan’s oil imports.
Imran Khan, in his inaugural speech, also reached out to the Pakistani diaspora living outside Pakistan for financial help. Pakistan’s economic situation is alarming and Imran Khan has a long march ahead towards economic recovery. Engaging external expertise in economic planning is a good step but the new government needs to find a sustainable solution to the economic woes and reducing its reliance on the external funding in the longer run.
(Dr Shalini Chawla is a Senior Fellow at the Centre for Air Powers Studies, New Delhi.)