Pakistanis must celebrate this Independence Day.
Pakistan has given up its hopes of getting the last two tranches of $11.3 million loan from the International Monetary Fund. The loan has been suspended since May 2010 and could have been resumed till September this year. What does this breaking of ties with the IMF mean for Pakistan?
- No budgetary support for Pakistan from other multilateral donors including the World Bank, the Asian Development Bank (ADB) and the Islamic Development Bank (IDB) because Pakistan can not provide the “letter of comfort” from the IMF.
- Moody’s credit ratings for Pakistan are B3, and Standard & Poors credit rating is B-, which are both classified as junk status. This means that Pakistan has very limited ability to borrow money on the markets at reasonable rates.
- Higher inflation (around 20% or so) as the government of Pakistan will continue to borrow more heavily from the State Bank of Pakistan for budgetary support.
- Stalling of economic reforms in Pakistan which could have reduced the fiscal deficit (currently estimated at 6.5%) and put Pakistani economy back on track. These reforms include widening of the tax base (current tax-to-GDP ratio in Pakistan is 8.5%) and trimming of energy subsidies (currently at 1.5% of GDP).
- An impending economic crisis as Pakistan starts repaying its IMF loans in February 2012. The seemingly healthy foreign exchange reserves of now will then get depleted to alarming levels. The impact will be exacerbated with the US stopping PCCF and CSF payments to Pakistan.
- Poor foreign exchange reserves would restrict Pakistan’s ability to import items, including crude oil (a fair share of it is on deferred payment basis from Saudi Arabia).
- This will lead to further weakening of the Pakistani rupee and an increase in the trade deficit.
- Slashing of development budget as Pakistan’s defence budget would continue to be supported fully by the treasury, both overtly and through circular funding.
- All this will lead to low economic growth — probably in the range of 3% per annum. This would adversely impact the already poor Human Development Indices in Pakistan.
Higher inflation, lesser development budget, high military budget, low growth rate — this is a recipe for economic disaster. Add the problems of Islamist militancy and radicalisation of Pakistani society and you can imagine the magnitude of the problem India has on its western borders.
Does the solution to this problem lie with the West or with the multilateral aid agencies? No. The problem is of Pakistan’s own creation and the solution also lies with Pakistan. No amount of external aid or soft loans can help Pakistan unless the government of Pakistan can generate greater resources of its own steam and match its expenditure (mainly consumed by the military) to the resources available. This needs structural reforms in the economy which the current Pakistani government is singularly incapable of pushing through. In fact, no other government would be in a position to do better. This exposes an endemic weakness of the Pakistani state itself: the military, landowning and political elite are getting richer at the expense of the state.
In these circumstances, the future of Pakistan’s economy — and consequently its people — doesn’t look all that bright. But today is a day of celebration for them. They must celebrate today for the rest of the year may not give them much to celebrate about, at least economically. Happy Independence Day, Pakistan!