Prime Minister Imran Khan, who came to power after July elections, is under pressure to generate external funding as the country faces the latest in a long line of financial blowouts. Photo: AP
Prime Minister Imran Khan, who came to power after July elections, is under pressure to generate external funding as the country faces the latest in a long line of financial blowouts. Photo: AP

Pakistan to seek IMF bailout, stocks gain

Pakistan's foreign currency reserves have plunged 40% in 2018 to the lowest in almost four years. The nation is running twin current account and budget deficits of more than 5% of GDP

Islamabad/Karachi: Pakistan’s stocks and bonds rose and the rupee fell after the government said it would seek the nation’s thirteenth International Monetary Fund bailout since the late 1980s in a bid to stabilize the economy and plug dwindling finances.

The South Asia nation’s key stock measure snapped six days of losses to advance as much as 3%, the most in more than four months, before paring some gains, while its dollar-denominated bonds maturing in 2027 climbed the most since July 26. The rupee, a managed float, fell at least 4.6% against the dollar, according to people familiar with the matter. The move is speculated to have been pushed by authorities in response to the IMF’s calls for a weaker exchange rate.

After consulting with “leading economists", Pakistan will formally approach the IMF for support and Finance Minister Asad Umar will hold talks with officials during the lender’s annual meetings in Bali this week, the Finance Ministry said in a statement late Monday. Umar told Bloomberg in August that the government may need more than $12 billion.

Prime Minister Imran Khan, who came to power after July elections, is under pressure to generate external funding as the country faces the latest in a long line of financial blowouts. The IMF said last week that recent government efforts haven’t been sufficient to stem a looming crisis.

“The challenge for the current government is to ensure that fundamental economic structural reforms are carried out to ensure that this spiral of being in an IMF program every few years is broken once and for all," the Finance Ministry said. “To correct the underlying imbalances, fiscal and monetary actions needed to be undertaken without delay."

Foreign currency reserves have plunged 40% in 2018 to the lowest in almost four years, while the nation is running twin current account and budget deficits of more than 5% of gross domestic product. Authorities have devalued the rupee multiple times since December.

The currency’s latest drop to between 130 to 136 per dollar, according to the people who asked not to be identified as they aren’t authorized to speak publicly, comes after the IMF repeatedly stated that the rupee was overvalued. “The currency move is definitely a devaluation," said Shahid Habib, chief executive officer at Arif Habib Ltd.

“The market knows the macroeconomic conditions and based on those, they are having their own expectations for the exchange rate," said Abid Qamar, a spokesman at Pakistan’s central bank

The central bank has raised interest rates to the highest in three years to help shore up confidence in the economy.

Bailout addiction

“Going to the IMF was a matter of when, not if. For an economy that has become addicted to foreign loans and bailouts, the future is very much like the past," said Uzair Younus, a South Asia director at Washington-based consultancy Albright Stonebridge Group LLC. “Pakistan may very well find itself seeking another bailout in the next three to four years if it does not do structural reforms."

The government has deep problems to fix. Less than 1 percent of the nation’s more than 200 million people file tax returns and its exports, including textiles, lag the region. However, Pakistan has yet to formally approach the IMF, the lender’s Chief Economist Maurice Obstfeld told reporters in Bali.

“We’ll be listening very attentively when and if they come to us," Obstfeld said. “The government expressed a desire to enact deep structural reforms that might break the cycle of Pakistan needing financial support from the fund frequently. That is a very good sign going forward."

US approval

Islamabad has also taken on more than $60 billion of loans from China to bolster its decrepit infrastructure. Critics see that as part of a debt diplomacy trap by Beijing and question whether Pakistan will be ever be able to make the repayments.

Those vast debts have prompted worries from U.S. Secretary of State Mike Pompeo, who warned in July that he would be watching to see if Khan’s government uses IMF funds to pay off the opaque Chinese loans.

“Securing US approval on the IMF Executive Board will require Pakistan to strike a fine geopolitical balance between the Trump administration’s concerns over China’s growing economic engagement in Pakistan and the country’s bilateral commitments," said Bilal Khan, a senior economist at Standard Chartered Plc.

Pakistan’s economic outlook is also at risk from eroding gains in macroeconomic stability and growth may moderate to 4 percent in 2019 and slow to about 3 percent in the medium term, the IMF said on Tuesday.

“We will have to swallow this bitter pill," Pakistan’s Maritime Affairs Minister Syed Ali Haider Zaidi told Bloomberg in Karachi on Tuesday. “We have looked at all our options."

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

Close