ISLAMABAD – Multilateral institutions, economists and media experts arecoming up with their estimates of gross financing requirements in the rangeof $20 billion to $26 billion. The economy may need these dollars providedthe real GDP grows 6%.
In order to maintain the momentum of the real economy, the newly installedpolitical government is looking for bilateral, multilateral anddiaspora-related financing options.
In order to avert any political backlash, the government has called theInternational Monetary Fund (IMF) option as the fallback while otheroptions are being hammered.
Specifically, there is loud talk of bilateral financing arrangements withChina, Saudi Arabia and few other countries. Last year, these bilateralsources contributed around $7 billion to the economy and we may hope to getaround $8-9 billion from these sources now.
Eurobonds are another external financing option which the previousgovernment used after taking letter of comfort from the IMF.
Under the current financing conditions, getting financing through Eurobondswill be costly. In addition, overseas investors will normally subscribe tosuch bonds when a country is under an IMF programme. Even with thisfinancing option, a country may get $1-2 billion at most.
Another option of external financing is diaspora bonds which could beattractive for the overseas Pakistanis. The previous government laid thegroundwork in FY18, but did not proceed due to pressing electioncommitments.
The new government intends to capitalise on this option as soon aspossible. It will recognise in due course how much dollars it could getunder the current economic and political environment. However, this optionhardly bridges the present wide gap in gross external financing. Then comesthe lender of last resort – the IMF. Whenever a country faces problems onits external front, it goes to the IMF. The IMF provides necessary balanceof payments (BOP) support to the countries that are in dire need.
Apart from the BOP support, the IMF puts certain quantitative criteria forthe authorities to follow which, in simple terms, is called conditionalityclause. Some experts think that the IMF conditionality is tantamount tocommercial loaning which is not a proper statement.
IMF officials do macro modelling of a country and project a range of growthand inflation numbers. Normally, countries get loans from the IMF as pertheir quota. They may even exceed their quota if they present a strongproposal to the officials.
Some experts think that a developing country like Pakistan may need a nodof the US to get the letter of intent from the IMF. This statement alsoneeds qualification.
In a nutshell, seeking BOP support from the IMF is quite natural under thecurrent financial circumstances. If Pakistani officials table a soundproposal, it will have maximum chances of receiving the approval.
The key is the negotiation skills of the authorities concerned. IfPakistani officials convince the IMF that their proposal is workable andshow commitment to meet certain targets, the IMF will provide them certainconcessions.
On this basis, a home-grown package should be carefully crafted, debatedand negotiated to get maximum benefit for the country. In this regard, thephrase ‘begging bowl’ is just a political rhetoric.
BY: Doc Fahd Rehman, The writer is Assistant Professor of Economics atSDSB, Lahore University of Management Sciences (LUMS)
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