By Javed Hafeez
Pakistan’s economy performed quite well in the first four years of the last government — the annual growth rate crossed 5 percent and inflation was lower than in the period of the previous government. But things started changing in late 2017 as international energy prices started increasing. Oil and gas account for about one-third of Pakistani imports, which have now crossed $50 billion per year. As exports have stagnated at $22 billion for five years now, the balance of trade gap is substantial. This situation has resulted in the near depletion of foreign exchange reserves, and Pakistan’s currency has lost 15 percent of its value this year.
It has been clear for quite some time that recourse to the International Monetary Fund will be necessary this year. In addition to debt servicing obligations of about $6 billion, Pakistan requires a similar amount for its energy needs in the near future. A couple of weeks ago, Mike Pompeo, the US Secretary of State, said that a potential bailout by the IMF should not provide funds to pay off Chinese lenders. He was clearly jumping the gun, as Pakistan has not yet approached the IMF. Secondly, the Bretton Woods institutions, including the IMF, are internationally financed and managed. Thirdly, there was no point in openly politicizing a purely monetary institution.
Pakistan has had 14 IMF financing programs since 1980, the last one being a $6.7 billion loan in 2013. It has never defaulted in its debt servicing obligations. The IMF was indeed created, after World War II, to help developing nations settle their balance of payment obligations in difficult times. The US statement, in addition to being premature, was also out of place. More than targeting Pakistan, it was aimed at China. Beijing’s huge infrastructural investment in the China-Pakistan Economic Corridor over many years makes some nations uncomfortable.
Taking cognizance of Pakistani financial needs, the International Islamic Trade Finance Corporation, a member of the Islamic Development Bank group, rolled over a $100 million loan two weeks ago, according to credible media reports. The IDB has, according to the same report, pledged more than $4 billion for Pakistan’s oil imports over the next three years. A secondary aim of this facility is to help stabilize the Pakistani currency. Since the July 25 national elections, the rupee has gained in value. However, long-term stability requires strong fundamentals and one of those fundamentals is sizable foreign exchange reserves. The IDB facility will help save the reserves from further depletion.
The government of Pakistan also realized earlier this year that undeclared incomes at home and abroad should be brought into the national tax net through an amnesty scheme. Undeclared incomes and assets at home could be legalized by paying a 5 percent flat tax. Incomes hidden abroad could be repatriated back home and whitened by paying 2 percent tax. The response to this scheme has been very encouraging and more than $1 billion has come into the national exchequer. Through this process, the revenue authorities have also been able to expand the pool of taxpayers. China has also reportedly indicated a willingness to reschedule Pakistani debt repayments.
So Pakistan is no more in dire straits than it was a couple of months ago. We all know that Saudi Arabia is a major stakeholder in the IDB and has always been Pakistan’s friend in difficult times. One is reminded of 1998, when, after it carried out nuclear tests, economic sanctions were imposed on Pakistan. It was at that time that Saudi Arabia came to Pakistan’s rescue. One also remembers that the international community’s powers that be were not too happy with Pakistan detonating the nuclear devices and the Kingdom risked their ire by helping Islamabad. But that did not deter Saudi from extending that vital financial support at a critical hour.
Soon after last month’s elections, some TV news analysts said that the Gulf Cooperation Council states, including Saudi Arabia, were not happy with the results — but this was far-fetched. Pakistan-Saudi relations have retained their resilience despite many changes of leaders; this is because their interests converge in ensuring peace and security in a region that has seen much turmoil since 1979. Both of them are determined to fight the scourge of terrorism. Their inland and maritime trade routes have to be secured round the clock.
The Saudi ambassador in Islamabad was one of the first envoys to felicitate victorious leader Imran Khan. This perennial bilateral relationship is likely to further blossom and has no expiry date.
(Javed Hafeez is a former Pakistani diplomat with a lot of experience of the Middle East. He writes weekly columns in Pakistani and Gulf newspapers and appears regularly on satellite TV channels as a defense and political analyst. Twitter: @hafiz_javed)