Crisis of confidence?

The triple whammy of macroeconomic crisis, political instability and natural disaster has really narrowed the sitting government’s choices. There is a growing crisis of confidence at home and abroad, one that may be difficult to address even for the ablest of the technocratic governments, leave alone a political, coalition-oriented government of big and small parties whose survival is tested on almost a daily basis. Who would really want to oust the government at this time and do all the heavy firefighting in its place?

After the floods’ human devastations and economic losses, there is fear that the oft-implemented macroeconomic stabilization playbook – which is based on fiscal-monetary policies that suppress domestic demand to cool down imports so that the current account deficit financing becomes manageable – may have to be put aside in order to fund the demands of rehabilitation and reconstruction. Changing course at this stage would be a big no for the IMF and other official lenders. There’s no easy way out.

It would be easy to stick to ‘prudent’ policies if large-sized foreign aid materializessoon and multilateral lenders provide significant new financing to help the government fund floods-related rehabilitation and reconstruction projects. While there have been encouraging statements from bilateral and multilateral sources, it is not clear when, how and in what form the unspecified grant/loan assistance will be provided. Inflows are needed fast; as continued dwindling of forex reserves will further unnerve markets.

The PM and his entourage made forceful assistance pleas during UN General Assembly sessions. UN officials and key world leaders have also assured Pakistan of more support. However, the fact that the government had to publicly request for ‘debt relief’ marks a tacit admission that direct floods-related assistance may not be coming home in a major way. This has rattled the pricing of Pakistan’s dollar bonds, even though the said request was addressed to bilateral lenders (Paris Club), not private lenders.

There is a need for better crisis communication. Who will do it? Can the new (old) finance minister restore some confidence? It seems like it’s go-time for Ishaq Dar, as legal obstacles in his path have been carefully placed on the kerb. If Dar is able to manage the floods-driven import pressures and mobilize the EFF-related promised debt inflows from bilateral and multilateral sources on time, it may steadily build the reserves, calm the frayed nerves, and steady the currency, at least in the short run. Let’s wait and see.