In the midst of pre-election uncertainty, there is one thing of which Pakistanis can be sure. That is, regardless of whosoever triumphs at the ballot box, the country will be almost immediately set off, begging bowl in hand, to the International Monetary Fund (IMF).
The State Bank of Pakistan has devalued the rupee for the fourth time in just eight months. In real terms, this means a drop by as much as 5.3 percent; taking it to PK 128 against the dollar (USD). Though some reports have placed this at a slightly more conservative 4.5 percent. Either way, this is bad news; representing a total drop of around 20 percent since December. Indeed, by some accounts, Pakistan is now the worst performing currency in Asia for this year.
Emergency currency devaluations of this kind have been described as “quick and dirty fixes”; with the overwhelming dividend being cheaper exports. But even here, there are implications for international trade. Such as the not un-small matter of any nation persistently selling goods below market price risking anti-dumping charges as per World Trade Organisation rules. Also not to be overlooked is how a weakened currency offers less interest on loans; thereby boosting inflation.
In short, a devalued rupee will not stem haemorrhaging, even in the short-term, given how this exacerbates already gaping current account and trade deficits. Back in March, the rupee’s previous tumble gave way to the lowest levels of dollar reserves in three years. Fast-forward to this month and country is left with $9.6 billion in foreign reserves; sufficient to cover imports for a mere two months.
Even though it seems clear that an IMF bailout package may be in the pipeline, the next government will need to assess its impact in the long-run. Not least due to the incredibly high interest rate on loans. The effect of which was cushioned the last time around by low oil prices at the global level; thereby helping Pakistan to clear its $6.6 billion in Fund dues back in 2016. Yet today, international crude supplies are in a precarious situation; with Libya, Iran and Venezuela facing American sanctions which may or may not be part of a larger US trade war.
IMF handouts are not always the best remedy for local economies. Yet, Pakistan may end up with a 13th bailout. And as we know, this contributes to a boom-bust economy. Central to the IMF repayment scheme is the upping of foreign direct investment (FDI). But this, as has been well documented in the Global South encourages a ‘race to the bottom’ in terms of lowering social and environmental protection costs. Which is another way of saying that loan recipient nations are stranded on the back-foot.
Thus the incoming set-up must ask international creditors for a little breathing space; at least until it assesses how the FATF grey-listing will affect trade relations. Such appeals must be particularly be made to China, which has been injecting large cash injections by way of several loans outside of the CPEC framework.
The next government will have to take tough decisions. Such as addressing the fundamentals — with or without the IMF package. *
Published in Daily Times, July 17th 2018.