Record Breaking Reserves Mask Pakistan’s Actual Economic Situation

Pakistan has reached record levels of foreign-exchange reserves, reaching the equivalent of $20 billion US dollars. However, the International Monetary Fund (IMF) fears this is actually hiding economic weaknesses that will probably force the nation to request more aid from the IMF in the not too distant future.

Pakistan has reached record levels of foreign-exchange reserves, reaching the equivalent of $20 billion US dollars. However, the International Monetary Fund (IMF) fears this is actually hiding economic weaknesses that will probably force the nation to request more aid from the IMF in the not too distant future.

According to Bloomberg, At least half of the $20 billion stockpile is made of debt and grants. That money has flowed in during the administration of Prime Minister Nawaz Sharif, which began in May 2013. Unfortunately, analysts fear that money will flow out just as quickly as Pakistan begins repaying the IMF in 2016 or if the price of oil surges, creating another balance-of-payments crisis.

As Yawar uz Zaman, Vice President for Research at Shajar Capital Pakistan Pvt said, “This is borrowed money and not a reflection of a stable economy … Finance costs will continue to grow in the years to come, which will mean we will go for another loan from an international lender.” Sharif was responsible for a $6.6 billion loan from the IMF soon after taking office.

That triggered a stock market rally that put Pakistan among the world’s fastest growing economies. However, since that short boom he has struggled to attract further such inflows of cash due to the uncertain nature of the global economy and the wariness of foreign investors.

Pakistan’s Central Bank spokesman, Abid Qamar, said in a press conference on Thursday that he believes the nation’s record reserves will boost inflows of investment along with recent deals reached in China. However, when asked about the odds of another IMF bailout, Qamar sidestepped the question.

The threat of repayments to the IMF that begins in 2016 prompted Pakistan to begin a $500 million overseas bond sale in September. Unfortunately, foreign direct investments have been lower in 2015 than they had been since 2012, and there is no indication they will improve by the end of the year. Exports also declined to their lowest levels since 2009, and domestic bank withdrawals have increased by 38 percent from a year earlier.

However, Moody’s Investors Service announced in May that Pakistan’s reserves signaled a reduced threat of default on national credit accounts, raising Pakistan’s credit rating from stable to positive.

Yet, analysts feel that Pakistan’s reserves are not truly healthy. Although there may not be an immediate need to seek another IMF bailout, the government will probably seek another three-year program according to Ashfaque Hasan Khan, a former adviser to the finance ministry and dean of the School of Social Sciences at the National University of Sciences and Technology in Islamabad.

While the reserves cover about five months of foreign-exchange payments, the IMF said in an e-mailed response on Friday that this was still not enough.

“International financial markets have been volatile, the balance of payments position remains vulnerable, and reserves are still significantly below adequacy norms … Pakistan has the capacity to repay the Fund, but the materialization of risks to the economic outlook could erode it.”