Meanwhile, Exports Have Declined

By Author: John Joseph
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Falling exports also reflect disruptions being caused by the most serious power shortage in the country’s history. This domestic restraint on export growth is likely to persist with no end in sight to the electricity crisis.

The rise in the trade and current account deficits has coincided with the precipitous fall in foreign direct investment. In 2011-12, FDI fell by half, from $1.6 billion in the previous year to $813 million, the fifth consecutive year of FDI decline.

Remittances from overseas Pakistanis have been the big saving grace, reaching $13 billion in 2011-12. But with other external inflows tapering off, remittances and export earnings are not sufficient to meet the balance of payments’ financing requirements especially when the capital account has been deteriorating as net inflows dry up. As a result foreign exchange reserves have eroded in the past several months.

Against this backdrop, the view among government officials that $1.1 billion of Coalition Support Funds provides them a reprieve underestimates the impact on the reserve position of the accumulation of liabilities the country has ...
... to meet in the months ahead.

A significant part of these liabilities are repayments to the Fund for the $8 billion loan Pakistan contracted in 2008. Already repayments earlier this year have reduced the reserve cushion. More payments lie ahead. Between now and December, Pakistan needs to pay $1.1 billion to the Fund – including two big payments, this month ($411 million) and in November ($605 million). Another $800 million will be due by the time the government is obliged to call elections, in March 2013.

The key question is this. With reserves dwindling to less than adequate levels and by early 2013 to where they will cover just over a month of imports, how will the incipient financing crisis be addressed? The short answer, already being contemplated by the government, is to go back to the IMF for assistance under a new programme. But here is the rub. Top government figures have long indicated they would prefer an interim government to negotiate a new programme and take the political heat of “prior actions” that will be necessitated by a new arrangement.

There are at least two problems with this pass-the-buck approach. One, it can no longer be assumed that the IMF will be willing to conclude an agreement with an interim administration. The Egyptian case has set a recent precedent in this regard. Before agreeing to a $3.3 billion loan, the Fund insisted on a broad political buy in, which the interim government wasn’t able to deliver. And in Greece, where an agreement had to be concluded with an interim government to avoid an imminent crisis, the Fund asked for the leaders of the main parties to also sign up to this.bahria town Lahore