Soaring debt

EDITORIAL: The government’s total debt stock rose to 55 trillion rupees by end January 2023 as per data released by the State Bank of Pakistan (SBP) against 47.78 trillion rupees on 30 June 2022 – an increase of 15 percent during the first seven months of the current fiscal year.

External debt rose from 17.879 trillion rupees in December 2022 to 20.686 trillion rupees by January 2023, a rise of 15.6 percent entirely attributable to the decontrol of the interbank rupee rate on 26 January 2023 that prompted the International Monetary Fund (IMF) to announce its mission’s arrival on 31 January to restart stalled negotiations on the pending ninth review - a disastrous policy by all counts from an economic perspective which, had it not been implemented since October 2022, would have allowed for a more manageable rupee depreciation with a consequent lower overnight impact on the rise in debt stock with less of a negative impact on market perceptions as well as on inflation.

A market-based rupee-dollar parity, agreed in 2019 when the ongoing programme was first signed, is not defined as a free float or a rate dictated by the Fund, but is defined as a rate range determined by the SBP premised on existing economic fundamentals that include balance of payments position, foreign exchange reserves, etc.

By insisting on setting a rate lower than was justified by the economic fundamentals the country’s economic team leaders must accept responsibility for the dramatic rise in debt stock once that control was eased, after a massive decline in remittance inflows and foreign direct investment.

Concurrently, the government imposed administrative measures to reduce the pressure on the balance of payment – another disastrous policy that led to the piling up of containers full of imported goods at Karachi ports though in recent days these measures have eased somewhat leading to release of containers though reportedly at a snail’s pace.

There is, therefore, a widening trust deficit between the economic decision-makers and all other stakeholders – domestic and foreign – and the pervasive perception is that once the next tranche of the Fund is released there may again be a reneging on agreed conditions, given recent violations of prior actions agreed by the incumbent team and not its predecessors.

This may well be the reason behind the alleged shifting of goalposts by the Fund and is a reflection of agreement violations rather than the outcome of any concerted Western conspiracy due to our strengthening ties with countries opposed to Western diktat notably China, Russia and Iran.

Pakistan Investment Bonds (PIBs) were estimated at 20.9 trillion rupees in January 2023 against 20.3 trillion rupees in December 2022. In March 2022, as per the Economic Survey 2021-22, PIBs accounted for 16.529 trillion rupees - a highly inflationary policy as borrowing would be at a rate determined by the prevailing policy rate which must be in the positive realm as per a key IMF prior condition - a fact that accounts for a 3 percent raise, to 20 percent, during the last Monetary Policy Committee meeting.

And needless to add, Pakistan’s downgrade by Moody’s on 1 March 2023 from Caa1 to Caa3 included sukuk that will also raise the applicable rate of return as they are direct payment obligations of the government.

Citing external factors as being the reason behind Pakistan’s sustained economic impasse has become the norm and with the prospect of an international controversy added to the mix, Pakistan’s governments without exception tend to shift their own responsibility onto external factors for their failure to improve governance or implement structural reforms that target the existing elite capture, strengthen weak institutions or last but not least ease the high political and external vulnerabilities.

The short-term solution to create some leverage with the IMF team that would enable a phasing off of some of the harsh upfront conditions for the poor necessitates massive curtailment of current expenditure and sadly, the austerity package announced by the Prime Minister projected optimistically to generate 200 billion rupees may not generate more than 20 to 25 billion rupees over a year, given that all major expenditure items remain untouched in the package.

Copyright Business Recorder, 2023