A secret report by the State Bank of Pakistan to prime minister Nawaz Sharif last June noted that Pakistan’s total debt repayment in FY 1998-99 amounted to US$ 7.9 B — about US$ 5.65 B in debt amortization and US$ 2.25 B in interest payments. On the assumption that sanctions would be removed quickly, the SBP projected financial inflows of about US$ 9.9 B in the same period (US$ 1.65 B in Project Aid, US$ 0.23 B in Food Aid, US$ 0.925 B in Programme Aid, US$ 0.54 B from the IMF’s ESAF/EFF, US$ 1 B in new resident Foreign Currency Deposits, US$ 1.1 B in new Foreign Investment, US$ 3.6 B in short-term borrowings/roll overs and US$ 0.85 B in “other” receipts). This calculation left it with a “debt-related surplus of about US$ 2 B” at the end of the year. The SBP then went on to note trade-related foreign exchange payments and receipts during the year and projected a shortfall on this account of about US$ 0.593 B (Imports US$ 10.2 B plus Services US$ 1.2 B minus Exports US$ 9.2 B minus Remittances US$ 1.6 B). After taking “other deficits of US$ 0.529 B” into account, it projected an “overall balance of payments surplus of US$ 0.9 B” and ended up with a figure for Reserves on 30th June 1999 of US$ 1.8 B.
Six months later, the post-sanction situation looks quite bleak. Reserves are down to US$ 0.4 B and an amount of US$ 7.5 B in debt still needs to be forked over. Of the targeted financial inflows of US$ 9.9 B, so far not a cent has been received; exports are likely to fall below target by US$ 1 B; and new resident foreign currency deposits, foreign investment and remittances are likely to fall short of target by at least US$ 1.5 B. The only “relief” in the balance of payments is a US$ 2.5 B anticipated reduction in the import/services bill, on account of an economic slowdown and stringent foreign exchange controls. In effect, this means that, far from an “overall balance of payments surplus” of US$ 0.9 B” end June 1999, we are currently looking at a shortfall of at least US$ 7.5 B in this financial year.
Following Pakistan’s commitment to sign the CTBT sometime next year, however, we understand that the route has been cleared for the IMF/World Bank to return to Pakistan in December with a US$ 5 B “bailout” package comprising about US$ 2.8 B in debt rescheduling by the Paris and London Clubs, an immediate input of about US$ 0.52 B by the IMF from the balance of its US$ 1.2 B ESAF/EFF programme negotiated last year and about US$ 1.5 B by the World Bank/ADB/etc in fresh loans and project aid. The government is also hoping that Islamabad will soon become eligible to negotiate short-term loans/roll overs of swap funds of about US$ 3 B as originally projected — the total debt rescheduling, bilateral and multilateral loans and project aid amounting to about US$ 8 B. Does this mean that with a projected US$ 0.5 B “surplus” over our net forex requirements of US$ 7.5 B, our troubles are about to end?
No. There may be many a slip between the government’s maximum anticipated forex inflows on the back of the IMF/Paris Club negotiations and the actual reduced amounts which eventually, and more realistically, flow into its coffers, with the result that the forex gap may remain a significant constraint on the government’s ability to restore confidence and jump-start the economy. There is also the distinct possibility that Islamabad’s relations with Washington could become bumpy again if it drags its feet over important nuclear-related commitments already made to Washington for 1999 in exchange for a lifting of the sanctions. In the event, Islamabad will find that the IMF/World Bank/Paris Club, which are currently bending over backwards to appease Pakistan, will suddenly become “tough” again and start insisting on difficult conditionalities.
At the heart of the matter — all other things taken for granted — is the amount and terms of the debt rescheduling to be done by the Paris and London Clubs. This will impinge crucially on the nature of the financial space available to Islamabad. Will it be US$ 3 B for three years or US$ 2 B for one year or what? If Islamabad doesn’t get much leverage on this score, it will have to walk a tight budgetary rope and remain on track with tough IMF conditionalities. But if it does, the danger is that, as so often in the past, Mr Sharif could go on a spending spree and squander a golden opportunity to utilise the budgetary space available for an urgently required restructuring of Pakistan’s economy which reduces its crippling dependence on debt.
The Sharif government is about to receive a last life-giving injection. If it doesn’t give up on its errant, profligate ways, it will leave Pakistan up the creek without a paddle. Nothing short of a full-fledged nuclear roll back will then suffice to “bail” out Pakistan.