Major balance of payments crisis expected by December
Khalid Mustafa
Monday, October 08, 2012
From Print Editionhttp://www.thenews.com.pk/Todays-News-13-18012-Major-balance-of-payments-crisis-expected-by-Dec
ISLAMABAD: A severe crisis of confidence may hit Pakistan most probably by end this year because of expected massive pressure on foreign reserves on account of two heavy payments to the IMF and other donors in the months of November and December.
Pakistan’s foreign reserves stand at $14.841 billion, out of which the Central Bank has around $10 billion and the remaining reserves of more than $4.50 billion belong to commercial banks which the SBP cannot use.
The moment the foreign reserves of Central Bank of Pakistan which are just over $10 billion tumble to $8-9 billion, there would be a massive crisis of confidence in the country resulting in capital flight and putting tremendous pressure on balance of payments.
The people would go for dollarization that will also further increase the value of dollar in the country. The Rupee-dollarparity is currently at $1 to over Rs95. “Yes, we are expecting the huge pressure on balance of payments in the month of December after the payments to IMF, the foreign reserves will start vanishing with no reasonable financial inflows in the country,” top official sources in the Finance Ministry told The News.
When contacted, Dr Ashfaq H Khan, principal and dean of NUST Business School also expressed his fears saying that the crisis of confidence is likely to hit the country may be by December this year but certainly some time after December as Pakistan is to retire the debt of $5.30 billion to IMF and other donors. The county has to retire debt of IMF alone is $3 billion.
When the reserves of central bank would plummet in the range of $8-9 billion, the crisis will come and a big capital flight can be expected which would exert tremendous pressure on the balance of payment. “The current account deficit is feared to widen up to $4.50 billion.”
The sources in the Finance Ministry said that Pakistan is left with no option but to go for another $3-3.5 billion loan from IMF. They said that financial inflows in the country have also dwindled to an alarmingly low level as no budgetary support by ADB and World Bank and other countries is being extended to Pakistan since long. In case Pakistan inks another loan with IMF then external inflows will increase.
However, there is a catch 22 situation as IMF is not willing to negotiate with this government for the next loan programme. The Fund may negotiate with a caretaker set up, but the chances of that are very dim too as IMF authorities would prefer to negotiate the other programme loan with next government. Now the question arises as to what would happen with the Pakistan’s economy and foreign reserves by that time.
The IMF has also recently said about Pakistan economic outlook that the country’s external financial inflows position is weakening owing to which reserves of the State Bank of Pakistan have fallen. The Fund is also of the view that inflation which had fallen to single digit is expected to be back in double digits by the middle of next year.
“Meanwhile, some the donor countries including China have started questioning Pakistan’s debt paying capacity when it comes to negotiating new loans for various projects in the country,” the sources said.
According to senior officials dealing with debt management in the Finance Ministry the country’s debt paying capacity has eroded by 10 percent on annualised compound basis.
COMMENTS: This article doesnt even cover the forward contract liabilities of SBP. I will write about it when I get back to Texas.
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