Pakistan’s finance minister said the government has taken steps that will put the country on the right track and help the South Asian nation avoid an economic collapse. But this will cause pain to his people, he added.
The country is desperately fighting for its survival as the recent rise in commodity and energy prices has exacerbated its debt problems. It has been struggling to pay for its imports as its official liquid foreign exchange reserves fell by $754 million to $8.57 million in the week ended July 22 from the previous week. according to the country’s central bank.
“There were serious concerns that Pakistan would slide into Sri Lanka, that Pakistan would go into a default-like situation, but fortunately we have made some significant changes. We have introduced significant austerity, a tightening of the black belt. And I think we’ve avoided that situation,” Miftah Ismail told CNBC’s “Street Signs Asia” on Tuesday.
“We are now in an IMF program. We have reached the agreement at the staff level. We expect to get the approval of the board at the end of this month. We have removed the fuel subsidies, the power… We’ve raised taxes. So, I think we’re going in the right direction.”
However, Ismail acknowledged that the recent measures taken by the government will be difficult for Pakistan and cause a lot of pain for the people.
“But look at the alternative. If we had gone the Sri Lankan way, this would have been much worse,” the minister said.
Pakistan is facing a serious debt crisis similar to the currency shortage problems that have plagued its South Asian neighbor Sri Lanka this year.
Sri Lanka has been battling food and fuel shortages amid its worst economic crisis since the island nation’s independence in 1948. The country has default on your debt and has asked the International Monetary Fund for relief.
But unlike Sri Lanka, Pakistan was able to avoid bankruptcy by reaching an agreement with the IMF in July. The country arrived a staff-level agreement with the IMF to restart your stagnant extended fund.
Islamabad will receive a first tranche of $1.17 billion from the IMF in the coming weeks, with further loans possible in the coming months.
“Pakistan is in a difficult economic juncture. A difficult external environment combined with pro-cyclical domestic policies fueled domestic demand to unsustainable levels,” the IMF said in a statement.
“The IMF has identified a funding gap of $4 billion, meaning it wants our reserves to increase by $6 billion in this very difficult fiscal year,” Ismail said. “And of that $6 billion, he says we have $2 billion and we should try to get $4 billion from our friends. Most of us are there and I think in a day or two we’ll have that number.”
In July, Pakistan’s headline inflation soared to 24.93% year-on-year. according to official data — the highest level since October 2008.
On his Budget speech in Junethe finance minister emphasized that the government intended to lower prices by better using monetary and fiscal policy.
“I think wheat prices are coming down, commodity prices are coming down. Core inflation in Pakistan is still 12 or 13 percent, whatever the headline number is,” Ismail told CNBC .
“We’ve stopped monetary expansion. Our interest rates are pretty high now, I think. We should be able to get inflation back to where core inflation is,” he added.
The government needed to reduce its imports to reduce oil demand for energy-related items such as fuel and petrol, the finance minister said.
“Now that imports have come down, the pressure against the Pakistani rupee has eased. In fact, it appreciated about 7% against the US dollar last week. Now we will see inflation really come down.” he said.
Looking ahead, Ismail said, it is “very difficult” to give a time frame for when things will improve for Pakistan, although he added that the outlook is bright for the economy in the coming months.
“I would think that by the second quarter of this fiscal year, which starts in October, we should be able to handle the economy. Our three-month current account deficit number will have come down. The markets will believe more in our austerity measures. And things will start to look better.”