EDITORIAL: Pakistan has secured 775 million dollars from the Asian Development Bank (ADB) in support of the recovery and reconstruction efforts in flood-affected areas — support that is in addition to the 738.5 million dollars received till 2 December 2022 against the total commitment of 3.4 billion dollars from multilateral and bilateral partners.
While flood relief assistance has been appropriately touted by the government as climate justice yet it is relevant to note that the pledged amount is far less than the 46.4 billion dollar cost of damage due to floods cited by Ahsan Iqbal, the Federal Minister for Development and Special Initiatives.
If one adds the current state of the economy, post-floods, the situation is extremely dire and the ADB, in its 2023 Pakistan Economic Outlook publication, argued that the floods have further deteriorated the outlook as Pakistan was already struggling to regain macroeconomic stability.
Flood disruption and damage are expected to slow real GDP growth in combination with a tighter monetary stance, high inflation, and an unconducive global environment, the ADP further projected.
What has been fairly evident is the steady rise in reliance on external borrowing to support not only a periodic worsening of the current account deficit but also to strengthen reserves as well as for budget support.
What is extremely disturbing is finance minister Ishaq Dar recently accusing his immediate predecessor and a long-term party loyalist Miftah Ismail of failing to secure external financing rather than to focus on challenging his policies and his budgetary measures that envisage a one trillion rupee rise in current expenditure, and envisages the need for foreign borrowing of around 40 billion dollars for the current year alone — an amount that includes around 21 billion dollar interest and principal repayment as and when due, 5 to 6 billion dollars to strengthen the reserves which are at present at an appallingly low — 6.7 billion dollars — and the remainder in support of the budgeted expenditure.
This steady rise in reliance on external borrowing accounts for debt accumulation in foreign currency, that includes issuance of sukuk/bonds (debt equity) at very high rates of return during the past two administrations. It is relevant to note that PML-N during its previous tenure (2013-18) raised external debt to 92.5 billion dollars because of its policy to increase reliance on borrowing from abroad at a rate cheaper than the domestic rate of interest while keeping the rupee artificially overvalued that had severely negative implications on remittance inflows and exports. The objective was to understate the budget deficit.
Reliance on external borrowing rose to 130 billion dollars during the Khan administration which was used to not only clear past debts as repeatedly claimed by the then Prime Minister but 10 billion dollars was used for budgetary support with 50 percent of the then healthy foreign exchange reserves sourced to external debt.
However, subsequent to the onset of the Covid-19 the G-7 debt relief initiative implied that as total borrowing rose the repayment costs were deferred for two years as were the stringent monetary and fiscal policies that had been agreed under the Extended Fund Facility Programme effective 1 July 2019 after approval from the IMF board.
As aforementioned, in the current year 40 billion dollars external borrowing is earmarked as Pakistan’s requirements and currently only around 5 billion dollars has been received.
The remainder has been pledged by friendly countries to the IMF on behalf of Pakistan as per the seventh/eighth review documents. Had the present team of economic managers read the review documents they would not have accused Ismail of failing to secure the 40 billion dollars.
It is critical for the Finance Ministry to not only acknowledge the dire need for foreign funding at the present moment in time but be aware that it is critical to facilitate instead of impeding the formal start of the ninth review negotiations. This would require abandoning policies that include administrative and exchange measures (reflected by the widening differential between the interbank and open market rate), extending cheap credit to the tune of 1.5 trillion rupees under the agricultural package instead of targeting it to the poor and subsistence level flood affectees only, and giving unfunded subsidy to the exporters of 100 billion rupees by providing 19.99 rupees per unit of electricity to them.
It increasingly appears that the policies of the past are continuing and while previously the country had the absorptive capacity to withstand such policies yet that is clearly no longer the case and this has not only been recognized by the multilaterals, particularly the IMF as it has consistently refused to phase out its harsh upfront conditions, but also friendly countries that have linked their pledged assistance to Pakistan staying on the Fund programme.
It is about time that the Finance Ministry acknowledged the constraints it has to work within and instead of continuing to blame external factors and/or the previous administration or its own previous team it must begin to implement reforms that are economically sound and not focused on political considerations.
Copyright Business Recorder, 2022