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EDITORIAL: Moody’s downgrade of Pakistan’s outlook from stable to negative is a charge-sheet against the eleven plus parties’ coalition government for the more than six-week delay in reversing the relief package announced by former Prime Minister Imran Khan on 28 February — (a decision that violated the agreement reached by the Khan administration in the sixth review of the International Monetary Fund (IMF) programme) envisaging a 10 rupee per litre reduction in oil and petroleum prices to be valid till 30 June 2022 in spite of the projected significant rise in their international price due to the ongoing Russia-Ukraine war and the industrial package announced the following day that reinstated some of the exemptions eliminated as per agreement with the Fund.

This decision of the PTI government and the delay in its reversal has resulted in not only the Moody’s downgrade. It appears that this outcome on the country’s rating was expected as Finance Minister Miftah Ismail while addressing a virtual webinar titled ‘National Dialogue on the Economy’ this week, had revealed that Pakistan’s dollar bond was trading at 70 cents when the coalition government came to power and is now trading at 65 cents which, he added implies “we cannot float Eurobonds in the world market to raise fresh funds nor can we go to global commercial banks right now,” adding that “all roads lead to the IMF.”

Reserves are at an all-time low — at 9.7 billion dollars on 27 May 2022 as per the State Bank of Pakistan website while July-May 2022 trade deficit rose to 43.334 billion dollars year-on-year. Remittances, perhaps the only silver lining given the state of other key macroeconomic indicators, continue to rise but not enough to meet the trade deficit: 26 billion dollars July-April 2022, against 24.2 billion dollars July-April 2021 and 18.7 billion dollars July-April 2020.

Thus the need to shore up foreign exchange reserves with the government clearly responsible for tying its own hands by the inordinate delay in reversing unsustainable policy decisions of the previous government but also constrained by the Fund’s condition for the ongoing loan that requires roll over by friendly countries. China as per Ismail’s tweet on 2 June has refinanced 2.3 billion dollars on conditions that have not yet been revealed while Saudi Arabia and the UAE have made the rollover contingent on the success of the seventh review.

In spite of Ismail’s repeated statements that the country needs to go on a Fund programme, supported by his predecessor Shaukat Tarin on the floor of the House, yet Moody’s downgraded Pakistan’s rating based on the existing situation with the seventh review stalled with its associated difficulties to procure external loans at reasonable rates.

Delay in the raise in the price of petrol and products was implemented in two phases with only a six-day gap: on 28 May and 3 June which has raised the ire of the general public. Had the coalition government begun to implement withdrawal of this subsidy, correctly defined as a bomb on the economy by several incumbent cabinet ministers, soon after assuming the reins of government, then the time between the two phases would have given the public more time to adjust their household expenditures accordingly.

One may assume that Ismail’s decision to raise rates a week before the budget may be to make the expected severely contractionary fiscal policy, as per the reported IMF insistence, distinct from the raise in petroleum prices and electricity tariffs (base tariffs are to rise by 7.91 rupees per unit as per Nepra approval pending notification by the federal government) and therefore slightly more acceptable to the general public.

This would perhaps be a pipedream as data analysis suggests that the rise in inflation as a consequence of the withdrawal of subsidies on petroleum and products alone is likely to be upward of 6 percent. And based on which sectors and which items or services would be taxed or if already taxed then at a higher rate may well push inflation to a level that may push more than half a million households below the poverty threshold.

The monetary policy today is already severely contractionary, with a discount rate of 13.75 percent and interbank rupee-dollar parity of over 197 which, if accompanied by a contractionary fiscal policy in the budget for 2022-23 is likely to push even more households under the poverty line — a trend evident in 2019 till the onset of the pandemic due to implementation of precisely the same policies which had resulted in a considerable decline in domestic output (projected at only 1.5 percent by the Fund for the year) with a consequent negative impact on employment opportunities.

Undoubtedly, the challenges are huge and would be insurmountable unless a serious effort is made to slash current expenditure significantly. This would require major sacrifice by all recipients for the next two years as well as implementing reforms that, like in the past, would be vigorously resisted by all pressure groups.

Copyright Business Recorder, 2022


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