Economics For Dummies: Why Imran Khan and Asad Umar Have No Choice But To Seek An IMF Bail-Out

Imran Khan and Asad Umar
Source: Dawn

Imran Khan and Asad Umar are currently under fire for announcing their intention to seek an economic bail-out from the International Monetary Fund (IMF).

The criticism is especially scathing as one of the loudest promises that Pakistan Tehreek-i-Insaf (PTI) made during its pre-election campaign and later after coming to power was to stay clear of IMF loans. Prime Minister Imran Khan had gone as far as to say during one of his fiery speeches that he would commit suicide before begging IMF for a financial bail-out.

PTI and Khan had also made lofty promises of protecting the common Pakistani from the burden of excessive taxation and inflation. However, that promise, too died a quick death when the Finance Minister Asad Umar presented a “mini-budget” imposing heavy taxes on basic utilizes such as gas and electricity even before the new government had completed its first 100 days in office.

Speculation was rife for the last few days that the PTI-led government would soon head the IMF way. This misgiving was confirmed once Asad Umar expressed his intention to commence bail-out talks with the International Monetary Fund citing an imminent financial crisis.

In All Honesty A Bail-out Was Inevitable

While we understand the resentment towards Imran Khan and Asad Umar for making promises that they couldn’t keep, we have to understand why the reasons why they could not stay true to their word.

Balance-of-Payments are in Tatters

Pakistan is facing a very real balance-of-payments meltdown, which, if left unattended will not merely destabilize the Pak Rupee but will also make it virtually impossible for the country to repay its existing debt.

We’re Not Earning as Much Money from Exports as We are Spending on Imports

Never really known as an export giant, the last few months have been particularly rough on Pakistan vis-a-vis the balance between its imports and exports.

Rising oil prices are among the leading causes for this huge trade disparity. As reported by Dawn, between June 2017 and March 2018, about 70% of the country’s import bill comprised of spending in the sectors of energy, metals and machinery.

As opposed to this the growth that Pakistan’s textile exports did experience was too small to even partially off-set this imbalance.

Foreign Currency Reserves Have Taken a Huge Hit

The balance-of-payments crisis has taken – quite understandably – a toll on Pakistan’s foreign currency reserves.

It is estimated that the current reserves stand at around $10.3 billion. This amount is only sufficient to cover two-months’ worth of imports.

Devaluation of the Rupee Is Fueling Inflation

Since December 2017, the Pak Rupee has been devalued at least times against the US dollar pushing the country’s struggling economy deeper into inflation.

How Much Money Does Pakistan Need?

As per conservative estimates, Pakistan requires at least $12 billion to keep its economy comfortably afloat.

However, since the country has not completely repaid IMF the money that it borrowed during the last bail-out in 2013, it is highly unlikely that a $12 billion will be readily made available.

Pakistan’s best bet, according to financial analysts is receiving a bail-out package of $6.5 billion.

Can Pakistan Change It’s Economic Destiny?

Yes, but certainly not immediately.

Increased foreign investment is the key to Pakistan’s financial woes. Not only will increased foreign investment help boost Pakistan’s reserves but will also help to generate a large number of jobs for the country’s unemployed labour force.

If Prime Minister Khan lives up to his promises of bringing greater foreign investment, making the country a tourist hub and dramatically increasing the tax net, Pakistan can hope for a stable economy in the next five years.

Unfortunately, however, any other option, except for an IMF bail-out seems highly unlikely given the current state of affairs.