The road towards stagnation |
The IMF Executive Board approved another 1.2 billion dollars for Pakistan on December 9. Along with the press release, the IMF also released future projections, which gives us a glimpse of the Fund’s expectations.
The projected foreign exchange reserves are expected to climb toward 17.8 billion dollars by June, inflation moderating, and growth accelerating.
Deputy Managing Director Nigel Clarke praised Pakistan’s “strong reform implementation” and noted improvements in fiscal performance, including a primary surplus of 1.3 percent of GDP. These reassuring statements travel well in global markets, reinforcing positive sentiment among lenders and investors.
The distance between Washington’s optimism and Pakistan’s economic reality, however, has rarely been wider. Four deep-rooted gaps threaten to upend those projections: a financing gap, a trade gap, a fiscal-expenditure gap, and a credit-investment gap. Unless all four are addressed simultaneously, the new inflows will only serve to postpone the pressures building in the external and fiscal accounts.
Starting with reserves, Pakistan’s USD 14.5 billion worth of SBP-held reserves has remained unchanged since June. Of these, nearly USD 5 billion consists of Chinese deposits and swap arrangements that cannot be used to pay for imports. Another USD 3.3 billion come from the IMF, hindered by structural conditionality. After subtracting Saudi deposits, which are also rolled over and restricted, Pakistan is left with roughly USD 6 to 6.5 billion in usable reserves. That is barely six weeks of import cover. The IMF projection of reserves rising to USD 17.8 billion assumes that external financing will flow.
As economist Hafiz Pasha notes, the government’s own monitoring data shows that only USD 2.3 billion of the USD 10.9 billion budgeted for new foreign financing has materialised in the first four months of the fiscal year, reaching merely 21 percent of the target. Commercial banks have not extended a single US dollar of the expected USD 3.1 billion in private loans, and the planned USD 400 million bond issuance remains unrealised. Even China has slowed to a symbolic USD 37 million in CPEC-related project........