The $3 billion 'bailout package' from the UAE could not have come at a more crucial time for Pakistan, especially Prime Minister Imran Khan himself - who staked the country's financial health on help from time-tested friendly countries rather than going headfirst to the International Monetary Fund (IMF).
Just two days before the announcement of the package, Pakistan's central bank (State Bank of Pakistan) sent the financial market into a tailspin by announcing that the current account deficit, definitely the economy's number-one problem, had widened to another four-month high in November.
But fears that the finance minister would now have to grovel to foreign financers (read IMF) were thankfully pretty much dashed as the UAE came to Pakistan's aid just in the nick of time. Now, even if a Fund programme is still inevitable, it will most likely be on different terms than would have been likely in August. Hence Imran's tweet thanking the UAE government for "supporting Pakistan so generously," while underscoring, of course, how this "reflects our commitment and friendship that has remained steadfast over the years."
"We are very grateful to the UAE government because this foreign exchange inflow will definitely shore up our reserves and stabilise the currency," Dr Khaqan Majeed, the finance ministry's official spokesman, told Khaleej Times. "But most of all it will help the 'home grown stabilisation programme' being implemented by the government."
PM Khan has remained confident that the financial cushion from countries like the UAE will ultimately help avert immediate default as well as enable the government to argue a less austere, more people-friendly programme with the IMF. And he did not budge even as the local currency went into freefall (more than 28 per cent drop in the calendar year) and reserves fell to more less than two months import cover.
But even as his strategy is being vindicated, fresh challenges are emerging.
"It is no doubt a very important event, but not just because it helps diffuse the immediate balance of payments crisis (BoP)," said Dr Salman Shah, former finance minister. While it means that Imran's strategy is beginning to bear fruit, Shah believes this elbow room should be leveraged to immediately address vulnerabilities in the economy.
"BoP is on the mend, but on ground the biggest cause of our economic problems is the out of control trade deficit."
True enough, Pakistan has traditionally been high on luxury imports and abysmally low on value-added exports. That is why even record currency depreciation has not been able to breathe any life at all in export revenue. According to the Pakistan Bureau of Statistics, all measures combined led to just one per cent growth in exports in the July-November period of fiscal year 2018-19. "Our real problem is competitiveness, and this is where this help from Saudi Arabia and UAE will be most beneficial," Dr Shah added.
Now, finally, the government will have time to turn from fire-fighting to the real structural weaknesses in the economy. They will have the opportunity to carry out reforms aimed at ease of doing business, controlling electricity pricing and input costs, overhauling the power sector, etc. Put simply, the friendly loan does not mean we are completely out of the woods yet, but it does give us the opportunity to structure towards a "competitive market-based economy."
These developments could also turn around the perspective IMF programme as well. With sovereign investments (in Pakistan) on the line, perhaps friendly countries would also like the Fund to manage the reform programme, ensuring adequate monitoring.
Let's not forget that, at the end of the day, all this friendly help just amounts to a bailout that will only keep Pakistan from going belly up. These are not development loans or grants that will lead to revenue generating projects. And previous governments have also relied on similar friendly concessions just to stay solvent.
But that only made us chronically addicted to debt even for the day-to-day running of the government. That is why the market was not too impressed even as everybody celebrated the announcement, swinging wildly, losing most of the day's gains and ending only slightly above water.
So far, the government's ambitious 'home grown stabilisation programme', which aims at maximum non-IMF loans to keep fiscal and monetary policies independent as far as possible seems on track. But, as we turn from avoiding default to building the economy, getting old friends to shake their pockets for us could well turn out to be the least of our problems if Imran's new team does not keep its eye on the ball.
By Shahab Jafry
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