Pakistan at present not only requires 36 to 42 billion dollars (the former figure cited by the International Monetary Fund (IMF) in its seventh/eighth review documents and the latter by Minister of Finance Miftah Ismail) - an amount which does not take account of the havoc wrought by the devastating floods - but an additional 15 billion dollars as per the preliminary assessment of the flood damage.
Pakistani authorities submitted the following to the Fund, which has been uploaded on its website attached to the seventh/eighth review documents dated September 2022: “We have secured adequate long-term financing from our international partners to support our economic reform program. Current projections suggest that with the policies outlined in this Memorandum of Economic and Financial Policies (MEFP), the gross external financing needs for FY23 will amount to approximately US$33 billion (including the current account), of which about US$22 billion is amortization to multilateral and bilateral official as well as commercial creditors.
To close this gap, we have secured US$7 billion as rollovers of existing and US$4 billion in additional financing commitments from bilateral, multilateral, and commercial partners. In line with program financing commitments, key bilateral creditors have at least maintained their exposure to Pakistan.”
There is recent confirmation that the 7 billion dollar rollovers from key bilateral creditors has been secured; however, the 4 billion dollars additional financing commitments, including the 978 million dollars deferred oil facility, have not yet been disbursed. The foreign exchange reserves’ position of the State Bank of Pakistan dated 26 August was 7.69 billion dollars and subsequent to the recent disbursement of the 1.16 billion dollars by the IMF the total reserves rose to 8.799 billion dollars by 2 September. By 9 September the reserves had declined marginally to 8.69 billion dollars.
It is also relevant to note that reserves held by banks which may reflect inflows for flood victims have not appreciably increased since 10 June this year when the amount was 5.957 billion dollars, declining to 5.720 billion dollars by 30 June 2022, rising to 5.9 billion dollars by 15 July, 5.638 billion dollars on 29 July, 5.7160 billion dollars on 12 August, 5.67 billion dollars on 2 September and 5.6923 billion dollars on 9 September. Any significant foreign inflows for flood victims are therefore not visible in SBP’s or commercial banks’ accounts.
The World Bank has indicated it would divert 300 million dollars for flood relief and rehabilitation from the existing portfolio (so no additionality), Asian Development Bank has allocated 3 million dollars, while the IMF inexplicably remains silent. Donations by countries are either through planeloads of items required by the flood victims or through their own relevant foreign aid departments.
It is important to note that IMF’s seventh/eighth review documents notes that “Pakistan’s capacity to repay the IMF is adequate subject to steadfast program implementation. The IMF’s exposure reaches SDR 6,088 million (or 300 percent of quota and about 80 percent of estimated gross reserves at Sep 2022) with this review. With full purchases, it will peak at 360 percent of quota in FY23. As assessed before, elevated risks — notably from delayed adoptions of reforms, high public debt and gross financing needs, and low reserves — could jeopardise program objectives, and erode repayment capacity and debt sustainability. Uncertainty about global economic and financial conditions amid the war in Ukraine and COVID-19 pandemic add to these risks.” No mention of a prevailing factor whose impact would be greater than all these concerns combined: floods with 33 million impacted and a looming second disaster as per the World Health Organisation due to the onset of flood-related diseases.
The government acknowledged that “despite strong nominal GDP growth, the debt-to-GDP ratio at end FY22 is projected to increase slightly to 78.9 from 77.9 percent a year earlier. The larger-than anticipated fiscal deficit and the significant exchange rate depreciation (more than 30 percent over FY22) were the principal drivers of the increase in government debt. Going forward, debt levels and gross financing needs relative to GDP are expected to gradually decline on the back of strict fiscal and monetary discipline. Nevertheless, higher interest rates, uncertainties regarding raising of debt from international commercial and capital markets, and dependence on commercial banks as holders of government securities in domestic markets, pose significant risks to debt sustainability.”
True, however, the means to address these vulnerabilities were also highlighted and included: (i) updating and implementing the Medium-Term Debt Strategy (MTDS). The objectives as always are salutary but never achieved in the past and unlikely in the current year especially after the floods; (ii) Reinvigorating efforts to lengthen the maturity profile of domestic debt – a policy followed by the previous government in 2019 with disastrous consequences as the 13.75 percent discount rate at the time (a Fund condition), raised the country’s indebtedness significantly whose effects are evident in our budget today.
Today the rate is 15 percent, and converting short to long- term maturity at this time would further raise the total debt payable; (iii) Devising an adaptable set of debt instruments that would allow a flexible response to evolving domestic and international market conditions and trends in the financial industry.
Pakistan’s capacity to borrow at “reasonable” rates has been compromised as Miftah Ismail recently admitted that “yes our credit default risk has gone up, our bond prices have fallen”, adding that “Pakistan’s next big payment – I billion dollars in international bonds – is due in December” which, he stated, will absolutely be met; and (iv) establishing a debt management office which will design and implement a debt management strategy however a strategy will have to be implemented by the political leadership and even those administrations that have pledged to reduce debt have simply increased it.
The foregoing indicates that the incumbent government like its predecessors is focused on borrowing to meet its requirements – both budgeted expenditure as well as interest on foreign loans/debt equity, repayment of past loans as and when due and to meet the trade deficit.
The Fund report further notes that a “strong framework for program monitoring (including continued quarterly reviews and updated program conditionality)” would be supplemented by “focused technical assistance in support of program implementation,” with technical assistance defined as one that “maybe delivered in multiple missions and/or continuously over a longer period, including remotely.” In other words, constant oversight by the Fund bodes ill for the general public as the contingency plan in the event of failure in any one month to generate the target revenue would lead to rising fuel cost due to the levy of general sales tax (up to 17 percent), and withdrawal of exemptions with a negative impact on output and employment (already compromised due to tight monetary and fiscal policies). And finally, the Fund notes that “adequate execution of existing financial commitments are essential mitigating strategies,” which with 4 billion dollars pending gives room for concern.
The country’s economy is between a rock (disbursement of external pledged assistance) and a hard place (with the major recipients of the bulk of government budget unwilling to make the necessary sacrifices) which places the onus on the hapless general public of which a large part is struggling with survival amidst the floods.
Pakistan authorities pledged to the Fund to limit spending at 16.9 percent of GDP; however, as the GDP for the current year is grossly overstated at 5 percent one would hope that expenditure curtailment is on the cards. And also pledged that risks of greater spending would be dealt with through triggering the contingency plan – a pledge bafflingly made when the flood waters were rising leaving millions in need of assistance though till date the money has been diverted from the Public Sector Development Programme (as in the past) and not through diverting Benazir Income Support programme allocation as pledged to the Fund though for how long this pledge would be met is anyone’s guess.
Something is rotten in the state of Denmark to quote Shakespeare, if applied to Pakistan’s economy today, would, sadly be the best case scenario.
Copyright Business Recorder, 2022