KARACHI, Sept 8: Pakistan is entering a historic election cycle with key vulnerabilities growing within the economy. Given the uncertainties involved in the election cycle, a danger that worries many people is a sharply deteriorating economic situation in the midst of a noisy and chaotic transfer of power.

Most eyes are on the foreign exchange reserves these days. Does Pakistan have sufficient reserves to prevent a dramatic slide in the value of the rupee over the course of the next nine to ten months?

The government is confident that given the state of projected inflows and outflows, things will remain broadly stable. According to figures provided by Finance Minister Hafeez Shaikh in an exclusive interview to Dawn, Pakistan has already paid $700 million in debt repayment to the International Monetary Fund this fiscal year, and “over the rest of the fiscal year, we are to pay another $5.6 billion, which includes the IMF but also all other debt payments”.

The country’s foreign exchange reserves have been on a downward glide path since December of 2011, when they touched a peak of just above $18 billion. Latest State Bank figures show total reserves at just above $14.8 billion, with the downward trend continuing in spite of a $1.1 billion Coalition Support Fund (CSF) inflow on Aug 2.

Even the total figure is misleading, since close to $4.4 billion of that is kept with commercial banks, and a large fraction is “encumbered,” to use a banker’s jargon, meaning that it has been borrowed from the banks through complex instruments known as swaps and forwards. This encumbered amount had touched a peak of around $2.5 billion at the start of 2012, but it’s unclear where it stands today.

“Our forecast for external flows from our different partners, bilateral flows as well as commercial transactions is 5 billion plus so I think the forex reserves are likely to remain more or less stable during this year, and of course remittances are strong and exports will hopefully remain as they were last year,” say Hafeez Shaikh. “I think the situation would be manageable.”

But not everybody is convinced. Salim Raza, former State Bank Governor, thinks that this number ought to factor in developments on the trade front as well. “Where the Exchange rate may be by the end of this fiscal year will depend importantly on how current account trends shape out, in the second half of the financial year,” he says.

It’s not clear what sorts of assumptions the finance minister’s projections are built on, regarding the direction in which oil prices may move this year, or what will happen to food prices. “A current account deficit heading towards last year’s $4.5 billion will be a problem," says Salim Raza, especially in view of the repayments to the IMF.

A breakdown of the expected inflows shows some optimistic assumptions. For instance, it includes $800 million from auction of 3G licenses in the telecom sector, although whether or not an auction takes place before the arrival of an interim government is far from clear. It also includes funds from the Etiselat purchase of PTCL.

Senior executives from telecom operators describe expected inflow from 3G auction as a “plug number,” meaning the government has created the figure just to plug a projected deficit. They also bristle at the suggestion of investing more in Pakistan at a time when the government has suddenly dropped a bombshell of a tax liability – totaling 47 billion rupees including arrears and penalties – on the sector.

“They say they want to raise $800 million from the sector on the one hand, and then they do this!” says Aamir Ibrahim, Chief Marketing Officer at Telenor. “This is going to scare away investors rather than invite them into the sector.” It’s equally unclear whether the funds from Eitselat will materialize, given that the government has been pursuing them unsuccessfully for over 4 years now.

Erosion of the reserves will mean depreciation of the currency, and if unchecked could make it necessary to arrange quick emergency financing from somewhere. For Pakistan there is only one place from where to get this: the IMF.

So could it become necessary for Pakistan to seek another IMF facility in the middle of the election cycle?

The finance minister becomes visibly uncomfortable when asked, and then speaks slowly, carefully as he weighs each word.

“We have a continuing dialogue with the IMF,” he says. “They have been reliable partners in the past, if the situation warrants, one can consider some sort of a new arrangement with the fund. I think the nature and the timing and the sequencing are issues which would have to be discussed at the appropriate time.”

Beyond this he is not willing to say anything publicly. The marked refusal to rule out a new approach to the fund is noteworthy as is the need to hew to a careful line between exuding a misplaced confidence on the one hand and conveying a sense of vulnerability on the other.

Besides the reserves, the fiscal front is also in the line of fire as election related uncertainty mounts.

“Massive hemorrhaging, subventions for the power sector, populist spending,” says Dr Hafiz Pasha, one of the county’s leading fiscal experts. “They will spend in 6 months what they normally spend in a year.”

Some of this spending has already begun to show up. So far, in the first two months of this fiscal year, the government has already lifted more than 200 billion rupees from the commercial banks, about 33 billion rupees more than the corresponding period last year.

The overall figure of government borrowing is down from last year though, says Dr Pasha, because it includes retirement of State Bank borrowing, to the tune of 111 billion rupees, from the CSF funds received in August.

But finance minister Hafeez Shaikh is confident the elections will not disrupt the country’s fiscal health by much. “We’ve done a good job staying within our fiscal constraints,” he says, and adds that there will be no overruns or borrowing beyond what has become normal over the past few years.

With precarious reserves and a shaky fiscal environment, the political noise that will dominate the system increasingly in days to come runs the risk of drowning out the economy’s vulnerabilities. The real danger is that through it all, there will be no clear ownership of the economy and its management.