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EDITORIAL: The Ministry of Finance is reportedly stumped as to where to arrange the resources required to fund the 19.99 rupee per unit electricity tariff subsidy for the five export-oriented sectors, announced by Finance Minister Ishaq Dar on 6 October, as well as to clear the backlog subsidy amounting to a hefty total of 144 billion rupees.

A day later Moody’s downgraded Pakistan’s credit rating to Caa1 from B3, which was challenged by the finance minister who stated that “they [Moody’s officials] have to meet me. I told them if you don’t [reverse] this I will give you a befitting response in our next meeting.”

The same day Ministry of Finance issued a terse statement maintaining that “Ministry of Finance strongly contests Moody’s unilateral rating action as no prior consultation/meetings were held as is required. Pakistan is currently under the IMF programme, the continuity of which is based on the confirmation and confidence in the country’s ability to maintain fiscal discipline, debt sustainability, and its ability to discharge all its domestic and external liabilities.”

It is unclear whether there was a meeting between officials of the finance ministry and Moody’s staff during the IMF/World Bank annual meeting in Washington DC (10-16 October); however, the rating remains unchanged; two weeks later on 21 October, Fitch too downgraded Pakistan’s rating from B- to CCC+ though so far neither the finance minister nor the ministry of finance has, so far, commented on the downgrade.

Four reasons for the downgrade by Fitch are: (i) plummeting reserves that are less than one month and a half of imports at 7.87 billion dollars – reserves envisaged to be shored up by pledged roll-over and borrowing from friendly countries particularly Saudi Arabia, the UAE and China. The pledge as per the IMF documents was made directly to the Fund, indicating the criticality of meeting IMF conditions, prior as well as post all remaining quarterly reviews.

Since early September disbursement of the IMF tranche, after the success of the seventh/eighth reviews, there has been no foreign inflows from friendly countries raising concerns about the capacity to meet external debt servicing costs though World Bank announced reallocation of existing pledges for flood relief and this week past Asian Development Bank approved a 1.5 billion-dollar loan for Pakistan; (ii) fiscal tightening, higher interest rates and measures to limit energy consumption and imports - policies supported under the IMF programme though not being fully implemented at present - would narrow the current account deficit despite the reduced exports and the higher import needs in the aftermath of the floods.

However, with the expected rise in the international prices of oil next month subsequent to the OPEC+ decision to curtail productivity this maybe short lived; and (iii) Pakistan’s external public debt maturities in the current year are over 21 billion dollars, mostly to bilateral and multilateral creditors, which mitigates rollover risks, and there are already agreements to rollover some of these; and (iv) Fitch writes that “the downgrade reflects our view of increased risks of policies potentially undermining Pakistan’s IMF programme and official financial support.”

The Prime Minister and his team including the Finance Minister is currently in Saudi Arabia, no doubt to seek the disbursement of the pledged amount and ideally to secure additional financing or, in other words, the policy remains the same: to meet payment liabilities through borrowing.

Thus the visible onus remains on the government’s capacity to borrow at a cost (multilateral/bilateral/commercial banks/issuance of debt equity) or reschedule/defer loans. Ideally, this approach should be accompanied by undertaking reforms and revisiting the usual budgeted expenditures and resources.

It is therefore critical for the Ministry of Finance to acknowledge that three finance ministers, including the incumbent, optimistically, though mistakenly, maintained at the outset of their appointment that they would be able to convince the Fund to phase out harsh upfront conditions based on their previous interactions with the Fund; however, all three failed to realise that sustained poor governance led to a state of the economy that no longer allows for any Fund concessions – a state towards which all three men were involved in their previous tenures.

Today, what is required is out of the box thinking that not only envisages implementing politically challenging policy measures for the power and tax sectors but also for the state-owned entities that account for a budgeted one trillion rupees every year as well as ending the elite capture of the country’s scarce resources through sustained fiscal and monetary incentives.

Copyright Business Recorder, 2022


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