Pakistan is currently under an unremitting balance-of-payments crisis with foreign exchange reserves of less than $10 billion, barely enough to cover two months of imports for one of the world’s 40 largest economies.

The cause is a ballooning current account deficit that has quadrupled in size in two years because Pakistan has been importing much more than it exports.

The misconception

Conventional wisdom has it that the problem is driven by the China-Pakistan Economic Corridor (CPEC), which involves multibillion dollar investment in infrastructure and energy. Imports of Chinese machinery, manpower and resources as well as the repayment of Chinese loans to fund the corridor have, therefore, pulled down reserves from a high of $18bn two years ago.

Imports from China have remained stagnant as a percentage of total imports for the past three years

This has prompted Pakistan to once again knock on the door of the International Monetary Fund (IMF) for a bailout, which will be its 12th since the 1980s. This sounds similar to the stories coming from many African and South Asian countries that have benefitted from China’s foreign policy-driven largesse, ostensibly marking another tale of overstretch by the middle kingdom.

A problem of consumption

Main street and numbers, however, tell a different story. Fruit sellers in the bustling port city of Karachi offer cartloads of apples from New Zealand and China. Furniture shops boast wares from Turkey and Europe. Edible oil imports from Malaysia and Indonesia have grown constantly and are now touching $2bn.

Markets are abuzz with imported cell phones and cars, including sport utility vehicles, from Japan and South Korea line the meandering streets of major urban centres. Even the textile sector — that hallowed fort of the country’s export machine — is facing competition from imported western brands. The country of over 200 million with a voracious appetite and over five per cent growth is consuming increasing quantities of imported goods, even in areas where its agrarian economy should provide local producers a competitive edge.

Then there is oil. Petroleum and liquefied natural gas (LNG) imports have soared 60pc in two years as the oil price increase and rising thermal power generation capacity enabled by Chinese investment helped bridge Pakistan’s six gigawatts of energy deficit. Most of this energy has gone towards domestic consumption with industrial expansion lagging behind its potential.

While China is part of the story, it is not the pièce de résistance. Imports of machinery and heavy transportation equipment account for less than 15pc of the widened current account deficit. Imports from China have remained stagnant as a percentage of total imports for the past three years.

While the repayment of debt has been increasing, it is no more than a drop in the ocean compared to the more significant issue of the trade imbalance. On the flip side, Chinese inflows have significantly supported the balance of payments. Chinese investment now accounts for over half of the total inward investment. State-owned policy banks have provided the much-needed external account buffer to finance what is mainly a consumption-driven problem.

Reforms under the IMF

As the commodity cycle turns, Pakistan finds itself in a familiar position where an overvalued exchange rate exacerbates the lack of competitiveness and structural reforms. China has been part of the solution. It has helped bridge the energy deficit and channelled the much-needed investment into infrastructure.

Some of the steps that are needed to address imbalances have already been taken, with four currency adjustments since December 2017 that devalued the rupee more than 20pc against the dollar. The central bank has raised the key interest rate by 1.75 percentage points over the last six months due to the overheating in the economy.

However, avoiding a default on international payments requires doing more. China has recently provided Pakistan with a $2bn loan, but that is not sufficient. What is required is the discipline of an IMF programme complemented by support from allies like China and Saudi Arabia. The Pakistan Tehreek-i-Insaf-led coalition government has the mandate to engage the Fund and initiate reforms.

It is not just a Chinese problem either. Repayments to the IMF double in 2019 and increase by another 50pc in 2020. The Fund “promotes international monetary cooperation and exchange rate stability, facilitates the balanced growth of international trade, and provides resources to help members in balance of payments difficulties”.

That is, in a nutshell, the Pakistan problem. An approach to the Fund driven by genuine macro-economic structural problems should not be sacrificed at the altar of global foreign policy.

The writer is a financial services professional

gibran.ahmad.pk@gmail.com

Published in Dawn, The Business and Finance Weekly, August 13th, 2018