Debt for debt

Prime Minister Shehbaz Sharif’s visit to Qatar was not pointless after all. Qatar is to spend $3 billion on various commercial and investment sectors in Pakistan. Saudi Arabia and the UAE have already committed billions. Quick at the heels of the investment deal with Qatar, Saudi Arabia’s King Salman is said to have again directed his administration to invest $1 billion in Pakistan. In the final reckoning, it is Arab help that is saving Pakistan from almost certain default on foreign obligations, because their funding commitments were a precondition for the IMF programme’s revival. But then again: at the end of the day, these are mostly borrowings to pay off a loan. The net effect is that you still have a lingering loan to repay. We are creating inflows today at the cost of outflows tomorrow. We are strapping Pakistan with more debt merely to repay prior debt. Without the necessary structural reform, we will forever remain caught in an annual cycle of scrambles to avert one balance of payments crisis after the other. If we allow that to happen, we may soon arrive at a stage where there are neither Arab friends standing by to help us out nor an IMF willing to throw a lifeline.

Qatar’s sojourn has enabled Prime Minister Shehbaz Sharif to turn to his real task – pushing through with the structural reform Pakistan signed up to institute as part of the contract for the IMF bailout. Looking at the big picture, Pakistan’s economy will remain on the rocks even with the IMF’s Extended Fund Facility (EFF) programme that is helping inject a grand total of $7 billion into the country’s economy from its beginning in 2019 to its conclusion in 2023. Which is to say, the economy will struggle whether or not the government keeps its promises with the Fund in return for a bailout tranche to avert a balance of payments crisis. Pakistan has entered several IMF programmes in the past and the country has a reputation for falling short on its commitments to the Fund. The coalition government apparently struggles to hold a firm policy line and the economy continues to face unrelenting pressure from many directions.

Under the circumstances, PM Sharif will do well to remember that any popular adventurism that derails the IMF programme will leave it to certain default, something Pakistan can ill afford. The only path in the other direction passes through the painful reform measures necessary to put our economy firmly on its feet. The time looks ripe to start worrying about what happens beyond the IMF programme – barely months into the future. The EFF provides a short-term answer to our external debt problems, but in the medium-to-long term, our balance of payments will remain stressed without serious structural reforms. Pressures on the foreign currency reserves and on the exchange rate of rupee will resurface very sharply if efforts are not made to bridge the trade gap. The government has to increase the tax-to-GDP ratio. A farm tax that the high and mighty have long resisted should be introduced forthwith.