EDITORIAL: Recently in an interview to an international news agency, the Finance Minister of Pakistan, Miftah Ismail, categorically stated that Pakistan will ‘absolutely not’ default on its debt obligations. Ironically, utterances about debt default are growing.
Commentators and authorities are, therefore required to be very careful in using phrases such as ‘debt default’ and ‘debt restructuring’ as there could be adverse unintended consequences because the law of intended consequences is a phenomenon in which any action has results that are not part of the actor’s intent or purpose. This is a very technical and serious matter and should not be taken lightly, as has been the case lately. Hence the need for exercising greater caution and prudence.
The debt distress situation of Pakistan is not new. The debate on Pakistan’s unsustainable economic growth spurring on the back of imported consumption has been resoundingly, becoming bolder over the years. In 2020, renowned accountant and a former FBR (Federal Board of Revenue) chairman, Syed Shabbar Zaidi, described the federal fiscal system as ‘not a going concern’. But no one was using the word ‘default’ in the public domain. It was restricted to the drawing room talks.
Unfortunately, however, it is no longer confined to private conversations out in the public domain, polluting the environment. There are certainly global issues. The world is going through a commodity super-cycle that is being followed by a global recession and strengthening of the US dollar. Sri Lanka has defaulted. It has defaulted on debt for first time in history. Many other economies, including Pakistan’s, are perceived to be on the verge of default. But others are not expressing such fears so loudly.
One of the prime reasons for that is growing political uncertainty in the country. The acute political wrangling this year was the last thing the country needed in this dire economic situation. First the PDM (Pakistan Democratic Movement) started spreading this fear to coerce the then PTI (Pakistan Tehreek-e-Insaf) government.
Then a vote of no-confidence against the then prime minister, Imran Khan, came, dislodging his government. With high drama, the PDM government came to power. And then the ousted prime minister’s protest campaign began to cause perceptible jitters in the corridors of power.
The economic situation kept on worsening. Bad economic decisions were taken. First the then PM froze the petroleum prices with zero taxes. Later, the international prices increased, and the government started to roll out a subsidy. The new government of PDM took two months to reverse it. And the subsidy on petroleum and power piled up. To start with, the new government imported higher quantum of fuel at peak prices.
The IMF (International Monetary Fund) reviews got delayed and the fear of default started becoming a hot topic of public discourse. Tough measures were taken. Electricity and petroleum prices were increased. The Pak rupee kept on depreciating. Its protracted decline resulted in a huge rise in inflation (the highest in the country since the 1970s). As if that was not bad enough torrential rains and flash floods inundated nearly a one-third of the land mass of the country.
Despite being back under the IMF programme with the successful seventh and eighth staff reviews by the Fund leading to release of the withheld tranche, and the rollover of debt from friendly countries kicking in, PKR, however, continues to weaken.
Still the international bonds are trading at steep discounts – beyond junk levels. Still the markets are not sure about the financing needs for this year to be met. There are soft commitments from friendly countries; but the market has its own suspicions.
The finance minister in his interview expressed his optimism about the inflows from friends in stock and other forms of investment in this fiscal year. There is news about rerolling of $3 billion deposits by Saudi Arabia. The IMF country representative has given a comforting statement on the floods but nothing seems to assuage the nervousness to bring back the confidence to the market.
The angst grows with the increasing talk about possibility of a default. The difficulties around the current account deficit remain intact. Administrative measures of controlling Letters of Credits for imports have not been successful in arresting the PKR slide.
Basically, the confidence level is heading towards ground zero simply because there is no visible effort to address the fault lines. There is no progress on deep structural reforms. Imports and FBR revenue are heavily interlinked. The tax to GDP ratio remains a challenge.
The export figures as a percentage of the GDP are not promising either. The country cannot afford to grow at 4 percent which is not just sufficient to absorb new people reaching employment age in the workforce. The proverbial chickens are coming home to roost.
The hour of reckoning because of our profligacy may no longer be a distant possibility. There is, therefore, a compelling need to think out of the box and urgently undertake the structural reforms to address the fault lines in our economy and to do all this national cohesion and political stability are the sine qua non for fixing the woefully beleaguered economy.
Copyright Business Recorder, 2022
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