Pakistan’s external position is “comfortable” as its loan programme with the IMF comes to an end, finance officials have insisted – but other voices cautioned that that could quickly change.
“The IMF is a very important development partner for Pakistan and we will remain engaged with them. But what will be the type of relationship, we will have to wait and see,” finance secretary Waqar Masud told Emerging Markets.
Pakistan’s current Standby Arrangement of $11.3 billion signed in 2008 expires at the end of September. An Article IV consultation, during which Fund officials will review Pakistan’s economic policy progress, is scheduled for October.
Pakistan’s foreign exchange reserves touched historic highs in August, and Masud insisted that the country’s external position remains “stable and comfortable”.
But many voices warn that this can change very quickly. “Experience teaches that a seemingly ‘comfortable’ cushion of reserves can deplete with alarming speed,” said Meekal Ahmed, former executive director for Pakistan at the IMF.
Moreover, the reserve level is lower than it could appear. Of the $18 billion claimed by the government, $3.7 billion is dollar deposits in banks, and $8 billion is parked by the IMF. “Our net reserves are more like $6 billion, sufficient for eight weeks of imports at best,” said Hafeez Pasha, who serves on the State Bank of Pakistan (SBP) board.
Another complicating factor is the approach of a general election, which needs to be held by early 2013. A fiscal adjustment in the run up is unlikely.
Election year priorities are “reflected in our country by a desire to do public sector projects”, finance minister Hafeez Shaikh told Emerging Markets. “Last year we were able to restrain that, and the public sector development programme was one of the places where the cuts were made.”
Pakistan’s election cycle has already begun and is set to gain momentum following Senate elections scheduled for March. After that, an approach to the IMF will only possible after the elections are completed.
This means that, if no approach is made to the IMF following the Article IV consultations in October, the next window could be up to 18 months away, and Pakistan would have to fend for itself in the meantime.
With a softening position on its current account in the first two months of the fiscal year, the country could run a current account deficit of $4-5 billion by June 2012, said Pasha at the SBP. “With no financing surplus on the capital account, this would immediately transmit itself to the reserves,” he said, adding that the country’s reserves accumulation will be a challenging issue in the next 12-18 months.
But the real third rail of Pakistani politics is power tariffs, and the power sector presents the government with its biggest fiscal challenges.
“The area where I think we need to do better this year, is the power sector,” finance minister Shaikh said. “If we do not perform well, if we don’t meet or surpass expectations on this front, then clearly the fiscal worries will not diminish, in fact they will worsen.”