EDITORIAL: Federal Finance Minister Ishaq Dar addressed the nation this Saturday past, followed by planning minister Ahsan Iqbal two days later, both pleading with all stakeholders to desist from speculating on the possibility of default, terming it “baseless and irresponsible".
The finance minister challenged the methodology used by brokerage house Arif Habib Limited which increased the five-year credit default swap from 5,620 basis points on 14 November to 7,550 basis points on 15 November; this is reminiscent of his challenge to Moody’s sovereign credit rating downgrade on 7 October by one notch –- from B3 to Caa1 — adding that “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 meeting next week.” No further developments have since been publicly shared on this matter.
There is no doubt that the Pakistan’s economy is facing its worst-ever economic impasse reflected by poorly performing macroeconomic indicators –- a fact which is further complicated by high inflation, over 25 percent Consumer Price Index, a projected reduction in the growth rate to 2 percent and the need to assist the 33 million flood victims who are homeless and largely without employment.
What is absolutely critical to acknowledge today is the need to successfully complete the ninth International Monetary Fund (IMF) review which has been delayed and on which is dependent not only the disbursement of little over one billion dollars from the Fund but also over 10 billion dollar rollovers and an additional pledged injection of 4.2 billion dollars by friendly countries who have pledged to the Fund rather than to the government directly with one proviso: that the country stays on the path of reforms.
The success of the ninth review would also strengthen Pakistan’s capacity to borrow from the commercial sector abroad and/or engage in issuance of debt equity instruments at rates of return that are favourable.
Three decisions taken in October may be responsible for the delay in the start of the formal ninth review talks: (i) the unbudgeted 100 billion rupee electricity subsidy to exporters; (ii) the unbudgeted component of the 1.8 trillion agriculture package; and (iii) a policy rate that reflects a negative rate of return with core inflation at 14.9 percent. The rationale for these decisions notably that exports would suffer, or that the farmers need assistance subsequent to the floods or that any further rise in the policy rate would cripple the productive sectors is sadly not finding traction with the donors/Fund for the simple reason that they refuse to allow any further deferral of reforms.
The two sectors that have steadily witnessed a steady deterioration in performance and continue to contribute heavily to the current state of the economy are the power and tax sectors. The former at present has an accumulated circular debt of over 2.4 trillion rupees, which places serious constraints on the budget, while the tax structure remains geared towards the low hanging fruit, notably indirect taxes whose incidence on the poor is greater than on the rich while attempts to widen the tax net have remained largely unsuccessful. Administration after administration has abandoned politically challenging reforms and instead has passed on the donor condition to meet full cost recovery onto the domestic consumers, thereby fuelling serious social issues while with respect to taxes the focus has been on the total rise in tax collections each year, due to the growth of the economy and high inflation, while the tax-to-GDP ratio has stagnated to under 10.
The Fund has for the third consecutive review made it clear to the third set of consecutive economic team leaders that it will not be amendable to phasing out harsh upfront conditions that include a tight monetary and fiscal policy with obvious ramifications on the growth rate.
For the current year the budget envisages 40 billion dollars external borrowing to meet the following expenses: 21 billion dollars in debt servicing (including payment on debt equity notably Eurobonds/sukuk) and repayment of loans as and when due; 4 to 5 billion dollars to replenish forex reserves that plummeted to 7.95 billion dollars as on 11 November (less than 1.4 months of imports with international best practices suggesting that reserves must cover a minimum of three months of imports); 7 to 8 billion dollars trade deficit projected by the government while the remaining 6 to 7 billion dollars is no doubt for budget support.
This large amount of budget support is mainly to meet the ever-rising current expenditure while development expenditure, typically overstated in the budget, is slashed by the end of the year to meet the lender deficit targets with negative repercussions on the growth rate. It is significant to note that in spite of the massive economic issues facing the country the coalition government opted to budget a raise in current expenditure by a trillion rupees compared to the amount budgeted last year.
It is about time the government heeded to calls and realised that it needs to curtail its current expenditure dramatically, starting from targeting subsidies to the poor, end reliance on external borrowing for budget support, exchange restrictions are ongoing but to use the flexibility in the exchange rate to deal with balance of payment (BoP) pressures rather than on administrative and exchange measures, begins to unravel the prevailing issues in the energy sector starting from poorly negotiated contracts (whose resolution will take years but there is a need to start now) and last but not least, widen the tax net instead of taxing the already taxed.
Copyright Business Recorder, 2022
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