Without US aid, Pakistan govt will pay a heavy price

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Without US aid, Pakistan govt will pay a heavy price

At the heart of the problem is the government's inability to raise revenue.

By Shahab Jafry

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Published: Thu 19 Apr 2018, 9:30 PM

With its back against the wall politically, the last thing PML-N needs is a bad 'economic report card' as the last leg of the campaign begins. And considering the record high borrowing (and debt servicing cost), record deficit and precious little earnings, it is little surprise that Miftah Ismail - adviser to PM on finance - has rushed to Washington just days ahead of the annual budget.

It can't be for another IMF programme, of course, even though most experts have been predicting a new arrangement just around now ever since the Extended Fund Facility (EFF) wrapped up in 2016. He categorically ruled it out just a few days ago, just like Ishaq Dar did a few months ago, before disappearing into some London clinic; too sick to appear for his court cases or travel back at all, yet still able to win a Senate election. But, then, Miftah has also predicted 10 per cent growth, offered the steel mills for free to anybody willing to buy the national airlines, and appreciated the recent tax amnesty scheme as a stroke of genius. And he will attend IMF and World Bank Group 'spring meetings', just when things could not be more desperate.

If not the IMF, then he would most likely ask the World Bank for more meetings. A day before Miftah left, a local daily claimed, quoting a 'source' close to the finance ministry, that the government is planning to borrow $13 billion in the next fiscal primarily to repay old loans and keep forex reserves from going through the floor. This would break last year's record, when the government borrowed a (then) record $10.4 billion for the same purposes. And, if the 'source' copied the confidential information properly, the big idea is to squeeze the majority of these loans out of three multilateral agencies - Asian Development Bank (ADB), Islamic Development Bank (IDB) and the World Bank.

However, even if all three agree, why boast of not needing another IMF bailout? The economy will, eventually, run on borrowed money which will have to be paid back. And since much of the previously borrowed billions are now being paid back by borrowing more billions, the situation only becomes more complicated.

It turns out that, for Islamabad at least, the fund is the bailout option of the last resort. So not needing to go knocking at their door does not necessarily imply a feather in the cap, just that there are still others willing to lend.

Yet however attractive Miftah makes it for those agencies to help keep us afloat a little longer, the present environment also brings political complications that he might not be the best man to handle. Pak-US relations are at the bottom of the barrel. President Trump has already suspended security assistance amid threats of pulling the economic plug entirely in a few months. And Islamabad knows better than most that when Uncle Sam is not happy, big donors are not very eager to lend.

He will also try to meet some US officials to lobby against FATF (Financial Action Task Force) grey listing Pakistan in June. He's unlikely to repeat his earlier positions on the matter, like grey or black listing doesn't really matter for Pakistan, and that he's not too concerned even if the US cancels aid altogether. But even his best efforts are unlikely to bear much fruit because Washington went out of its way to keep Beijing and Riyadh from supporting Islamabad in this matter. Pakistan could have come up with a better idea than sending Miftah now to talk this over with a few officials.

With elections due in Jul-Aug, it seems the ruling party will spend much of the next two months explaining just why they are running from donor to donor for fresh loans. Wasn't the EFF, which the PML-N so proudly completed, meant to address declining reserves and increasing fiscal deficit? Why then, just two years after completing the $6.6 billion programme, do we still face declining reserves and the highest-ever deficit?

At the heart of the problem is the government's inability to raise revenue. It has failed, throughout its three tenures, to add value to exports or raise the tax net to any decent level. As a result, it has become addicted to debt - to the point that even the PM's kitchen at home runs on borrowed money. For the past couple of years, political compulsions have forced an unusually expansionary fiscal policy, cornered mainly around big projects with high visibility, which has meant putting off necessary reforms till after the election and pushing the deficit even further into the red.

Unless Miftah secures something substantial in his US trip, the press conferences after the budget will not be pleasant, and the election could be outright cruel.

Shahab Jafry is a journalist based in Pakistan


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