Resolving Pakistan’s Economic Woes – Weighing our options


By Hina Shaikh

Well into its second ever democratic transfer of power, and facing a looming balance of payments crisis just two years after the completion of a USD 6.6 billion IMF program, it is still uncertain whether Pakistan will seek another IMF loan to meet high-pressure external financing needs. The Economic Advisory Council suggested last week that the government must be prepared to take some tough economic decisions. It is not clear if these decisions include opting for another bailout. Given the health of the external sector, several experts believe that not going to the IMF may be far more economically and politically riskier than any alternative. The range of other options available will each have to be timed, pursued and implemented immaculately to cover the financing gap – a move which may not be realistic even if is probable.

The Economic landscape – The facts

The on-going balance of payments crisis has its roots in the current account deficit that quadrupled in the past two years touching USD 18 billion by the end FY18, up by 42.5 percent over the previous fiscal year. The State Bank of Pakistan has just around USD 10 billion worth of foreign exchange reserves – barely enough to fund imports for more than two months. Pakistan’s overall trade deficit in FY18 stood at USD 37.7 billion with imports standing at a record USD 60.9 billion. Government’s budget deficit is also well over 7 percent of its GDP. Foreign direct investment has only marginally improved since FY15, when it hit a record low. Pakistan will not be able to sustain its current growth at 5.8 percent for much longer.


Senior economists have estimated an external financing requirement of 26 bn for Pakistan which compares well with the IMF estimates of USD 27 bn and the Ministry of Finance’s calculation of USD 23 bn. According to a report by the interim Finance Minister, Pakistan would require USD 9.3 bn to meet its debt-related obligations in FY19 that includes repayments to the IMF[1].


Understanding the causes

The fiscal irresponsibility demonstrated by the previous government must be understood and acknowledged as a major contributor to Pakistan’s current financial crisis. To state simply, the government spent more than it collected. It incurred enormous expenditures in the form of large investments in infrastructure, energy, CPEC-related projects without increasing the revenue inflow. Secondly, it continued to import far more than it exported while export-led industrialization was pushed to the back-burner.

When governments are faced with a fiscal crisis they usually have three main levers to push the economy back on its feet. The first is to devalue the currency as an effective fall in the exchange rates can help the economy become more competitive. The State Bank has already devalued the rupee four times since December 2017 thus further devaluation may not be an option.

The second option is to curtail public expenditure under a tight fiscal policy. With a limited fiscal space, this can be done by managing demand – placing cuts in development spending, placing more taxes and reducing reliance on imports. Regardless of an IMF bailout, Pakistan will seriously need to slash down government expenditure.

The third option is to draw on temporary funds to help address immediate liquidity shortages and financing gaps. This is usually a last resort and works best as a means to give the country more time to deal with the deficit while making room for it to address the structural deficiencies. In the case of Pakistan, this option would most likely manifest itself as yet another IMF loan.

What will an IMF bailout look like?

Although IMF has not made any promise to bail out Pakistan, nor has Pakistan formally asked for one, the finance minister has clearly stated that if Pakistan does decide to go to the IMF, it will not be the first but the thirteenth time it will be doing so[2]. Experts anticipate a final word on it by end of this year. Pakistan may seek USD 10 to 15 billion in what could be its largest IMF package till date[3].

An adverse reaction from the US, IMF’s biggest shareholder, can complicate and extend negotiations. The US has clearly urged IMF not to promise any funding to Pakistan until it publishes full details of the loans it has taken from China to pay for CPEC. Currently the net transfers (i.e. disbursement minus debt-servicing) from China are positive. Re-payments don’t feature in the current financing gap. Thus the fear that IMF support will be used to bail out Chinese bondholders is unfounded.

Any successful IMF program requires government’s commitment to the policies outlined in the program. While the IMF is unlikely to refuse funding to any country its assistance will come with the standard neoliberal policy conditions that will include further devaluation of the rupee, privatisation of loss-making state owned enterprises, a rise in power tariffs and reduction in subsidies on agriculture. Associated with a new potential loan will also be extensive pressure to reduce aggregate demand of which the largest burden will be on the fiscal side. This will be critical for reducing the deficit from 7 to 5 percent of the GDP in the first year.

This could hamper Khan’s efforts to substantially enhance public spending and also hit economic growth. The last time Pakistan entered the IMF program, growth rate stood at under four percent. This poses a challenge to the new government, voted in with high expectations to set up an Islamic welfare state. As part of PTI’s 100-day agenda, its electorate will expect initiatives for social uplift and job creation. The PTI has promised to create 10 million jobs and build five million low-cost housing units in the next five years.

Exploring alternatives

While steps have been taken, such as multiple currency adjustments, to address economic imbalances, avoiding an imminent default on international payments requires much more. Going to the IMF will most likely lead to the imposition of inflexible and untimely policies for the new government, thus it is actively considering several alternatives. However, none of these options are sufficient to meet the financing needs on their own.

Government is considering placing regulatory duty on or curtailing certain imports to reduce the financing gap. However only imports from formal channels can be taxed. Most luxury goods are under-invoiced or smuggled so unless their true value is declared the benefits of such a scheme will be limited and this may encourage further under-invoicing.

Relying on the goodwill of some countries – Saudi Arabia’s help in deferring oil payments and rescheduling of some of the repayments under CPEC – can ease off some of the pressure. Other fiscal measures to reduce public expenditure, manage demand and control capital may help.

Government also plans to launch investment (Sukuk) bonds for overseas Pakistanis. This would be similar to the Central Directorate of National Savings (CDNS) – a dollar-denominated bond. However, borrowing from the capital market may be restricted following Pakistan’s altered credit ratings from stable to negative.

The government has also promised a massive privatisation drive by making a special wealth fund where all SOEs will be transferred to obtain necessary funds that may help with IMF negotiations for a more favourable deal.

Possibility of bilateral financial assistance also expands Pakistan’s menu of choices. China has assured Pakistan it can be counted on and its funding would not come with IMF-like conditions. However, Pakistan is becoming increasingly dependent on external financing from China’s state-backed banks since the last financial year, having secured loans worth more than USD 5 billion. It already lent Pakistan USD 2 billion in June this year – just ahead of the elections to boost its foreign reserves, and further loans from China will significantly add to a higher debt burden. In early August, Saudi-backed Islamic Development Bank (IDB) also agreed in principle to lend Pakistan more than USD 4 bn. Borrowing from friendly countries provides a low quantum at a much higher interest compared to IMF.

Sustaining growth – a long-term view

Whether we seek another IMF loan or not, the critical question to ask is if our government has a home-grown plan to make the economy stand on its own feet. A bailout will only provide breathing space and postpone the current fiscal crisis. Policymakers will have to take concrete measures to address the underlying causes of macroeconomic crises that repeats itself every few years.

The fundamental imbalances stem from a disparity between public sector spending and income, and an underdeveloped export base. An IMF loan will not address these structural shortcomings nor will it re-distribute the means of production to fix this. The sooner this is realised the better it will be for generating a plan for stable, inclusive and sustainable economic growth.

At the same time the government should also think through the design and associated conditionality of any stabilisation program. The conditions should not only be realistic but also speak to the structural deficiencies. Revenue inflow must be expanded by enhancing the tax base rather than tax rates. Subsidies should be targeted instead of being removed altogether. Privatisation of state-run-enterprises while necessary should be planned with a longer time horizon. At the same time a fundamental revisiting of the public policy and business environment is needed to encourage exports. Reforms also need to be introduced to leverage the potential of its youth and the private sector. Any further stalemate in policy direction to address these structural concerns will only lead to more macroeconomic instability in the future.

Hina Shaikh is the Country Economist at the International Growth Centre (IGC)

[1] “Stabilisation and economic growth policy recommendation paper”, prepared by the former interim finance minister Dr Shamshad Akhtar-led finance ministry.

[2] Technically it would be the seventh time excluding individual loans that were often combined or led to larger programme loans.

[3] 7.6 billion in 2008 is the largest IMF bailout package


  1. […] Senior economists have estimated an external financing requirement of 26 bn for Pakistan which compares well with the IMF estimates of USD 27 bn and the Ministry of Finance’s calculation of USD 23 bn. According to a report by the interim Finance Minister, Pakistan would require USD 9.3 bn to meet its debt-related obligations in FY19 that includes repayments to the IMF[1]. […]


  2. Solution to Manufacturing in Pakistan – Part 1

    Some people lament the “lack of manufacturing capacities” in Pakistan.Had the Pakistan state pushed for manufacturing capacities a few decades ago – it would have had the “NPA disaster of the Hindoo Nation”.The Aggregate of the NPA in the Banking,NBFC,CHit fund,Co-operatives and Unorganised sector,in Hindoosthan,would be around USD 300 billion USD (at the minimum) – which is enough to destroy Hindoosthan. An Oil shock or a 15 day full-scale conventional war,will destroy Hindoosthan – simply by the “geometric expansion of NPAs” and the “physical annihilation of manufacturing”,in North Western Hindooosthan.dindooohindoo


    There was no point in manufacturing in SAARC, a few decades ago, as everything was being sold by PRC,at half the total cost of the importing nation,and there was no skilled labour and management expertise in nations like Pakistan,at that point of time.The costs in PRC have now matured and stabilised and the tastes of the Pakistani consumer have stabilised and matured.

    Current Tenor

    The situation is ripe for manufacturing in the current times – with the benefit of obviating FX outflows and smuggling and boosting indirect tax revenue.

    Exanple of “As-Is” Import

    Let us assume that a product is being imported at a cost of USD 1000/piece or per ton CIF,with the Tariff rate of say 35% – wherein the actual compliance with duty,is only 10%.In this case,the profit which accrues to the trader or maker o/s Pakistan is not taxable in Pakistan,and the same applies to the sea freight and the freight forwarder’s commission.Since, the CIF cargo is misdeclared at Port Qasim – it is obvious that the sale of the said item,in the wholesale and retail market,would be w/o tax.

    Exanple of “Proposed” Manufacture – Case 1

    If the said item is made in Pakistan, the Marginal cost would be say,650 USD and the Total cost (including non cash and amortised costs) would be around USD 900. However, the manufacturer would need to import the materials or the item/component in CKD/SKD condition.Since,this will be a bulk import,in industrial packaging,it would be at a lower cost,and the importer would pay the merit duty applicable – as there will be no duty evasion,no smuggling, no corruption, no hawala and the
    USD outflow can be deferred.

    The indigenous cost in Pakistan such as salaries,purchases and power – would be subject to indirect and direct tax (and TDS) which cannot be avoided.In addition,the power consumption will provide a proximate estimate of the actual production of the factory.

    If the manufacturer has paid the import duty on material imports and has no captive DG set for power – then the sales of the products will have to be on record.Let us say that this factory is in State X , and he sells to a dealer in state X at the 1st point.Ideally the states should have a 1st point tax – and then all sales in the same state of the “said invoice” (of the 1st point of sale) will be exempt from indirect tax.If tax is at the last point – then that last point will never come and the Revenue deptt will keep on doing reconciliations.If there is a multi-point tax,there will be avoidance (as no one will pay tax on financial value addition),and the state will have to prove the sale at each
    point.So full indirect tax revenue will be realised on the mode of “1st point tax”.In any case, the factory will have all the data w.r.t the last point retailer as part of its CRM and its Dealer/Retailer incentives and Dealer management plans

    Exanple of “Proposed” Manufacture – Case 2

    If the manufacturer decides not to import the materials and purchases the same from local sources (who are the illegal importers) and does not use Grid Power or does not use metered Grid Power – the he would sell the products “off the record/books”.However,in this case, there will at least be some manufacturing in the state and the FX outflow would be “far lesser than before”.

    Fiscal Levy Model in Exanple of “Proposed” Manufacture – Case 1

    In the 1st case, the state should levy the import duty on the material or component imports,in a manner,such that the total taxes accrued to the state,across the supply chain of the manufacture for the unit,and its extended supply chain and staff = 35% (which was the original import duty on the finished product)

    In other words,the aggregate of the understated components, as under:

    Import duty on material/component import
    Tax of staff salaries of factory
    Indirect tax on local purchases
    Cess and Duties on SEB power purchases
    Tax on sale of Products
    Profit tax on producer and supplier of local purchases
    Cross Subsidy benefits to state on SEB purchases

    Should be around 35% of the finished goods price (NSR),which was the original import duty on the finished product

    Fiscal Levy Model in Exanple of “Proposed” Manufacture – Case 2

    In this case,for those products where there is no “on record manufacturing” in the nation, an import duty on materials equal to current deemed duty (hawala charges bribes and the actual duty paid) plus a small premium,can be imposed, to bring the downstream sales of the finished products into the indirect tax net (on the mode of the 1st point sales tax).Once the imported materials are “on record”,then the “downstream production” will also be on record.

    However,if the production is viable only by power theft,avoiding pollution taxes,doing hazardous manufacturing and evading the indirect taxes on sale of finished products – then the said production can be shut down – by licensing the production to the original manufacturers on a sole license basis with direct tax holidays.

    Alt Manufacturing Strategy

    In the Alt, based on import data from Pakistani ports and the export data from load ports, if the overseas manufacturers or traders are offered “sole manufacturing and sales rights”, in Pakistan or parts of Pakistan (by law or by banning imports or charging high duties/TBT etc.), the overseas suppliers will be glad to set up or partner with,local partners to set up manufacturing capacities,for all types of consumer goods (at the minimum)

    In addition, there will be several types of manufacturing which overseas suppliers/bankers/ entrepreneurs will be glad to outsource to Pakistan on account of pollution effluents, environmental issues,hazardous chemicals,requirements of water,obsolete or phased out technologies in USA/EU,labour intensive technology,2nd hand machinery on the books of cash strapped banks etc – who will be glad to relocate to Pakistan.

    Export Interface

    It would be reasonable to assume that the “VA norms” of various trade treaties applicable to Pakistan,would qualify the COO of these manufactured products,as Pakistani and thus,would qualify as “Nil Duty/Concessional Duty access” to export markets (even ignoring, the financial value addition)

    The manufacturing hubs of the abovesaid products can be located near Ports and also near the SEZ/EOU and within the DTA of the EOU (to lower logistics costs) – so that the manufacturers can offload excess capacities to SEZ and EOU on CMT/Job work or where the suppliers manufacture semi-finished products which are sold to SEZ and then exported – and this is treated as a Deemed/Physical export for the DTA Manufacturer


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