A long-awaited IMF Staff-Level Agreement (SLA) is finally done with. However, anxiety — especially in currency and international sovereign bond markets — is not yet over. The reversal in yields is marginal to none, which are still priced in at default range while the currency is still moving south. International investors and creditors are not convinced that stability is returning to Pakistan’s economy. Perhaps, they are linking economic stability to political stability. They are increasingly tagging Pakistan along with Sri Lanka. That is not good. The perception has not improved.
Ever since the vote of no-confidence was initiated, Pakistani markets have remained in a bearish mood. And with the ouster of Imran Khan (IK), politically charged public in urban and rural areas is making investors and friendly countries uncomfortable with Pakistan. By the time this article is published, the results of Punjab by-elections would be out. Irrespective of the results, stability may not return. If Pakistan Tehreek-e-Insaf (PTI) wins, the current setup of Pakistan Democratic Movement (PDM) would be in jeopardy. And if the Pakistan Muslim League-Nawaz (PML-N) succeeds, PTI and IK would refuse to accept results and political agitation will continue.
Hence, things on political front are not likely to calm down. And economic times are tough for people even with the International Monetary Fund (IMF). The conditionalities of IMF are tougher this time. MEFP (Memorandum of Understanding of Economic and Financial Policies) is not yet public. However, sources have revealed that targets are tougher than what was actually anticipated.
For example, fiscal primary surplus has been set at a higher level. NFA (net foreign assets) and NDA (net domestic assets) targets have been made stiffer. The government probably needs to raise higher foreign funding from friendly countries and from markets to build up foreign exchange reserves. The government debt financing shall pose a challenge along with financing the balance of payment gaps. The Fund may keep a closer eye on State Bank of Pakistan’s (SBP’s) intervention in the forex market. And seeing the higher NFA target, SBP may refrain from intervening. That is probably the reason why Pak Rupee has not appreciated despite the IMF’s nod.
Having said that, it is unfair to place the onus on domestic instability or on the IMF conditionalities. The global scenario is not helping Pakistan. Commodities are in a super cycle. The unwinding of economic stimuli offered during the pandemic along with the Ukraine war has put debt sustainability of a few financially stressed countries in serious jeopardy. Some have defaulted (such as Sri Lanka) and many others are on the verge of default (such as Pakistan).
The global sentiments are negative after Sri Lanka descended into political and economic chaos, yet no ‘supposed’ friendly country came to its rescue. International financing communities are comparing Pakistan to that situation. The economic meltdown in Sri Lanka has created an unprecedented political chaos. Seeing the charged-up crowd and negative sentiments of urban middle class against the incumbents — government and X, Y and Zs — they fear that tough economic conditions (inflation and possible shortages of energy and food) could trigger a similar scenario in Pakistan. Fear is growing. And lenders are keeping support at bay insofar as Pakistan is concerned.
Then domestic sentiments have aggravated due to rise in inflation and inability of the incumbents to take the economy out of the woods. The mantra built around ousting the PTI government was based on the supposed incapacity and incompetence of the PTI government to deal with the economic challenges and were blamed on negotiation of a poor deal with the IMF.
PML-N leaders built the narrative that they would have been able to fetch a better deal from the IMF and could have restored the confidence of international as well as domestic investors. The outcome is exact opposite. Economic woes have worsened in the last few months. The IMF is coming out as a tougher lender. Friendly countries are not giving anything without the IMF. The currency slipped due to political instability and then the failure to pass the impact of growing energy prices on to consumers (for months) has further weakened the economic fundamentals. Now tightening in the US and other developed economies would keep the PKR under pressure.
The political change was untimely. There was a momentum for growth in economy and revenues. The tougher steps could have been taken in time. The IMF would not have been delayed. And the situation might not be as worse as it is today. Yes, there would be inflation and spike in energy prices. But the increasing risk of default and comparisons with Sri Lanka could have been averted.
Assigning responsibility for this mess is best left to reader’s imagination. Nonetheless, a few bubbles are bursting. The supposed competency mantra of PML-N and super administrator perception of Shehbaz is bursting. The mainstream media is being exposed. The narrative built against tough economic decisions taken under PTI were in sharp contrast to what media is depicting today- be it the case of petroleum prices, LNG imports, inflation, exchange rate, interest rates or any other economic decision or outcome. The overall system is exposed. Political myths are bursting.
That might be good in a way. But the country is not in a good shape. It is utmost important to regain investor confidence to reverse the tide. For that political stability is imperative. And the political scenario is becoming chaotic with increasing economic woes for masses in the form of inflation and loss of employment. It’s a tough situation. One may pray for commodity prices to revert to mean. But that may take some time. And that time is critical. The situation is more dire than ever before. Hence the need for taking all the required steps in order to create greater political stability in the country.
Copyright Business Recorder, 2022