To all the PDF members who are following this thread: I am posting the news that has said about many of the economic woos Pakistan is facing now. Everything seems sweat when a person, an institution or a country borrows money from other sources. The rate of interest is low, there is a five/ten years of sweat grace period, and the lenders are our friendly countries, etc. etc.
The complacent country does not build up its own potentiality by training its own people gradually and keeps on borrowing the easy money. It starts feeling the pain only when it has to borrow more money to finance the payment of the previous loans. This is called the debt trap and I would say it is also a death trap for the sovereignty of a country.
Pakistan has reached somewhere near that stage and I do not find any reason to say that Bangladesh will not face the same in the very near future. BD is asking foreign countries to pay and build all kinds of physical infrastructures (roads, highways, expressways, bridges) many of which can be built with its own money and trained manpower.
But, the political people do not want this because it is easy to get bribe money in dollars in a foreign bank if it is a foreign loan. Locally financed projects are not directly administered by them, but the projects with foreign financing are. This creates a vicious cycle when the local people are sidelined who remain untrained and unemployed for generations, and have to go to foreign countries to seek jobs.
This is what I believe has happened to Pakistan and will happen to Bangladesh as well. The mind of the political people in BD is not very different from that of Pakistan. No hard feeling, please!!
- @bluesky -
https://bdnews24.com/economy/2018/10/18/imran-khan-not-sure-about-wisdom-of-accepting-imf-bailout
Imran Khan not sure about wisdom of accepting IMF bailout
PK Balachandran, bdnews24.com
Published: 2018-10-18 19:58:18.0 BdST Updated: 2018-10-18 20:04:31.0 BdST
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IMF chief Christine Lagarde shakes hand with Pakistan Finance Minister Asad Umar during the Fund's annual meetings in Bali. Photo: IMFNews via Twitter
Pakistani Prime Minister Imran Khan, under pressure from various quarters to accept or reject the idea of going for an IMF bailout to save the country from a grave financial crisis, is yet to make up his mind on the matter.
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With discussions with the IMF due on Nov 7, Imran told heads of media organizations on Wednesday, that Pakistan may not go for an IMF bailout after all. It could choose to solve its financial problems through prudent management instead, he said.
On the one hand, the US-led IMF is set to impose its stringent traditional conditions with an additional clause that Islamabad should review, rework and reschedule its burgeoning debt to China.
On the other hand, China has said that, while it is not against a “professional assessment” of Pakistan’s finances by the IMF, it will certainly insist that the IMF’s recommendations do not adversely affect the on-going economic cooperation projects in Pakistan, principally the multi-billion dollar China-Pakistan Economic Corridor (CPEC), which is allegedly the principal cause of Pakistan’s financial woes.
US PRESSURE ON PAKISTAN
US Secretary of State Mike Pompeo’s has said that the IMF bailout package to Pakistan should not be used by the latter to pay off its debt to China. This was echoed by the State Department Spokesperson Heather Nauert.
And writing in the website of the Centre for Strategic and International Studies, Mark Sobel, a former representative of the US in the IMF said: “While the China-Pakistan Economic Corridor (CPEC) holds forth the prospect of boosting the Pakistani economy, especially if investments are sound, the terms and conditions of much of the lending are opaque, and interest rates on some loans may be higher than Pakistan can afford. The IMF must ensure that its resources are not used to bail out unsustainable Chinese lending for CPEC.”
“The Fund (IMF) needs to have at its fingertips comprehensive data on all CPEC lending - its terms, maturities and parties involved. Chinese lending should be on realistic terms and consistent with Pakistan’s sustainability. Otherwise, China should reschedule or write down its loans, sharply reducing the value of its claims,” Sobel wrote.
It remains to be seen how the Imran regime is going to manage to bring about an equilibrium between these two contesting claims at its meetings with the IMF on November 7 when it is expect to seek a bailout of $6.2 billion.
DOMESTIC CHALLENGE
In the domestic sphere too the regime is set to face a challenge. The IMF will, in all likelihood, insist that the government gets the support of the opposition parties to any package that may be agreed upon, as it had done earlier.
But given the sharply antagonistic relations between the ruling Pakistan Tehreek-e-Insaf (PTI) party and the opposition Pakistan Muslim League (Nawaz) and the Pakistan Peoples’ Party (PPP), Imran Khan will have to marshal all his persuasive skills to sell a package ,which will necessarily be harsh.
The task has become tougher now, given the victories registered by the opposition in the just concluded by-elections to 35 National and Provincial assembly seats.
The PTI had a major upset, as voters in two constituencies, earlier won by Imran Khan, namely NA-131 Lahore and NA-35 Bannu, changed their mind and elected members of the opposition parties.
EXTENT OF EXTERNAL DEBT
The IMF has said that Pakistan’s external debt and liabilities now stand at $93 billion. And if the present trend continues, it could mount to $144 billion in the next five years.
The IMF has also estimated that the country’s foreign currency reserves would continue to decline to $7.075 billion by 2023 from $12.09 billion held by the State Bank of Pakistan now.
More alarmingly, the total external debt servicing would reach $19.7 billion by 2023 against $7.739 billion in the financial year 2018.
DEBT TO CHINA
Writing in Express Tribune, Salman Siddiqui has quoted Topline Securities to say that Pakistan will end up paying $90 billion to China over a span of 30 years against the loan and investment portfolio worth $50 billion under CPEC.
“The estimated return on Chinese investments (which is the sum of principal and interest on foreign currency debt and repayment of profits/dividend on equity investment) shows 40% return on investment,” the Topline Securities’ report on CPEC says.
“The amount increased to $54 billion after the inclusion of more projects in CPEC such as investments in Pakistan Railways and financing of the Karachi Circular Railways project. The volume of return would increase accordingly.”
“Infrastructure and power projects – part of the CPEC portfolio and divided across time in terms of priority – are expected to be completed by fiscal year 2030.”
Leading economists have estimated an annual average repayment of $3 to 4 billion per year to China post fiscal year 2020.
Also most CPEC-related projects are being funded abroad and Pakistan is not seeing any significant inflow of foreign exchange.
“It should be noted that project financing for CPEC is being done between Chinese companies and banks and around 25% of CPEC investment is expected to come in Pakistan,” the Topline Securities report said.
However, the report argued that repayment would be manageable given the projected surge in exports and drop in imports. CPEC has also put money in peoples’ pockets by generating 70,000 jobs so far.
CHINA MIGHT HELP OUT PAKISTAN
Pakistan’s heavy reliance on China to meet its developmental and strategic needs makes it hard for it to ask Beijing to reschedule or rework its debt repayments.
But eventually, as an “all weather friend”, China might oblige, though only if CPEC is not badly dented. Just as Pakistan cannot do without China, China cannot do without Pakistan. China has a huge financial commitment in CPEC and has a very significant strategic interest in it.
DIFFERENCES IN PERCEPTION
The first hurdle to be overcome in the Pakistan-IMF talks is the difference in perception about the nature of Chinese loans.
Pakistan’s Finance Minister Asad Umar told the media after his talks with IMF’s Christine Lagarde in Indonesia, that the State Department’ contentions about Chinese loans are “100% wrong.”
“Pakistan’s financing gap for the current year is about $12 billion and total repayments to China averages $300 million over the next three years,” Umar said.
“The terms of Chinese loans would be placed before parliament and shared with the IMF. We should show how China, a real friend, extended attractive financing to Pakistan for the long term. The Chinese embassy has endorsed this position in a recent tweet,” Umar added.
Former Finance Minister Miftah Ismail told Reuters that the “weighted average interest rate” of Chinese loans is only 2%. “These are not loans that will break our back,” he said.
As per Finance Ministry calculations for the next five years, Pakistan’s total annual debt repayments and profit expatriation by Chinese companies would be below $1 billion, Ismail added.
But in this context, Dawn writer Kurram Hussain asked: “How come the Planning Commission put out a figure closer to $3 billion year or so ago?
Finance Minister Umar denied a statement by his Information Minister Fawad Chaudhry that unacceptable conditions from friends, Saudi Arabia, China and the UAE, had compelled Pakistan to go for the IMF bailout.
“The IMF bailout program was taken with their consultation and there was no condition demanded either by Saudi Arabia, the UAE or China at all,” Umar said.
Pakistan has to go for an IMF bailout because of certain domestic and external factors, the minister explained.
Foreign exchange reserves dwindled because of the yawning gap between imports ($60 billion) and exports ($25 billion). And the debilitating external factors were the US sanctions on Iran and the trade war with China. This led to an oil price increase and economic uncertainty in the international market. An increase in US interest rates also created unfavourable conditions in the external sector.
WAY OUT
However, according to Prof. Rashid Amjad of the Lahore School of Economics, a question that should be asked is why 18 IMF programs in the last 30 years, have ended up with an unsustainable fiscal and current account deficit and a run on the country’s foreign exchange reserves.
The blame can be put at the door of the IMF as well as successive Pakistani governments. The IMF’s policies have been politically inconvenient. And there has been continuous economic mismanagement also.
Writing in Dawn, Prof Amjad suggested that the government draw up a “credible and consistent homegrown economic roadmap, a strategic three-year plan covering the coming years from 2018 to 2021.”
“On the stabilization front, this plan should target a staggered decline in the fiscal deficit from the current expected 7.2 % in 2018-19 (excluding measures in the revised budget) to near 5% over the next three years, supported by steps to gradually reduce subsidies and the adoption of new initiatives to increase tax revenues.”
“But we must never forget the terrible impact of a sudden steep decline in the fiscal deficit agreed on with the IMF in the 2008 program, which led to a collapse in the growth rate from 5.5% to around 0.7%. A cut in subsidies resulted in food inflation of over 25%. The economy never quite recovered from this,” Prof Amjad pointed out.
“Most importantly, the strategic plan should be supplemented with the outline of a medium-term development plan that serves as a framework for cuts in development expenditure, shelving or reduction of projects and reallocation of funds for projects including those under CPEC.”
Other countries like Malaysia have cut expensive and non-priority Chinese- funded projects drastically.
“In the negotiations with the IMF, it would be sensible to agree to a 24-36 months, $8-9 billion fund program, frontloaded with the release of a sufficiently large initial tranche to calm the markets and restore business confidence,” Amjad said.
Finance Minister Umar has said that government will see that the IMF’s conditions do not impact on the poor harshly. He pointed out that fuel prices have been differentiated so as not to hit the poor hard. Electricity prices would also be similarly differentiated.
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