Pakistan faces a currency crisis. Who will help?

IN 1918 a British army officer brought his frayed football to be repaired at a factory in Sialkot, a city in what is now Pakistan. Although more accustomed to making tennis racquets and cricket bats, a local artisan was nonetheless able to restitch the ball and, even better, replicate it, according to the Sialkot Chamber of Commerce and Industry. Over the next 100 years, the city has prospered as a manufacturing hub, making surgical, leather and sporting goods. It exported over 920 tonnes of sports balls in the first three months of 2018, according to Sialkot Dry Port Trust. It is even the source of the (stitch-less) Adidas footballs that will be trapped, dribbled and passed in the World Cup beginning this week.

Despite this sporting contribution, however, Pakistan’s exports as a whole have lagged behind the country’s aspirations. Its import bill, including onerous payments for oil, has expanded uncomfortably, raising its current-account deficit to 5.3% of GDP this fiscal year (which ends this month), according to Standard Chartered, a bank. That, in turn, has put heavy pressure on the rupee. It stumbled by about 5% during trading on June 11th, the third big drop since December.

This was described as a deliberate “devaluation” by almost everyone but the central bank, which maintains that the currency is left largely to market forces, even as it has squandered its foreign-exchange reserves (down from $19bn in 2016 to $10bn this month) in an effort to prop it up. This fear of falling probably reflected political pressure from the outgoing government, which saw a strong rupee as a sign of economic prowess. It completed its term at the end of May and will contest a general election on July 25th. In the meantime, the country is in the hands of a technocratic “caretaker government”. It is a good moment, then, to let the currency slip.

It may slip further. The oil price remains painfully high and the central bank’s fire-power is even more limited than the headline data suggest: if its hard-currency liabilities are deducted from its hard-currency assets, its “net” foreign-exchange reserves are now negative, points out Bilal Khan of Standard Chartered (see chart).

When Pakistan has previously found itself in this predicament, it has turned to the IMF for help. The country’s policymakers are adamant they will not do so again. Many Pakistanis are expecting help from an alternative source instead: China. They believe their eastern ally is bound to step in, if only because it is partly responsible for their plight. According to this view, the deteriorating balance of payments reflects heavy spending on imported materials for the China-Pakistan Economic Corridor (CPEC), a string of ambitious transport and energy projects that form part of China’s wider Belt and Road Initiative.

This argument probably overstates both China’s culpability and its generosity. China is not chiefly responsible for the decline in Pakistan’s dollar reserves, because the higher import spending entailed by the CPEC has been accompanied by greater lending from Beijing. To put it crudely, China has invited Pakistan to spend Chinese loans on Chinese goods. Eventually, those loans will need to be repaid, of course, which could pose problems if the CPEC investments earn disappointing returns. But eventually is not now.

The problems of the present originate elsewhere. As well as higher energy costs, they reflect loose fiscal policy and rapidly growing domestic credit. Fixing these will require some combination of lower government spending, higher interest rates and a cheaper currency. Although China will not want to see Pakistan go bust, it will not want to dictate its macroeconomic policies either. That is the IMF’s job. China, then, is more likely to supplement an IMF programme than supplant one.

Politicians will lament Pakistan’s loss of economic independence, but similar objections have not prevailed in the past. Between 2001 and 2013 Pakistan turned to the IMF three times. In fact, there were as many IMF bail-outs of the country over that period as there were World Cups. Apparently, it’s time for another one.