EDITORIAL: Federal Finance Minister Ishaq Dar’s optimistic evaluation of the state of the economy with a visiting business delegation centered on his oft-repeated claim that Pakistan is not on the verge of a financial crisis and will absolutely not default coupled with a written rejoinder submitted to the National Assembly by the Ministry, noting that total domestic debt stood in 2022 at 4.77 trillion rupees while external debt was 4.56 trillion rupees; on the same day that the National Accounts Committee (NAC) met late night, after it was postponed four times due to differences over key macroeconomic indicators, and further downgraded the growth rate from 0.8 percent to 0.29 percent in the current year with a 59-year inflation high of 36.4 percent.
Even this reduced figure of growth of 0.29 percent is being contested by independent economists and there are credible reports that the Pakistan Bureau of Statistics (PBS) had originally worked out the growth in GDP at a negative 0.5 percent and was coerced to spruce it up to 0.29 percent.
Three observations are in order. First, domestic and external debt data pertains to 2022 and not the current year one would assume it’s calculated at the average rupee-dollar parity prevalent last year – a parity that has worsened considerably since 27 January when Dar was compelled to finally abandon the disastrous policy of controlling the interbank rupee dollar rate as a precondition for the start of the negotiations on the ninth IMF review in February 2023.
Second, total domestic debt in 2022 was 28 trillion rupees, which has jacked up to nearly 35 trillion rupees today as the incumbent government generated nearly 7 trillion rupees from selling treasury bills and Pakistan Investment Bonds to domestic commercial banks at very high rates with the discount rate continuing to rise to the current level of 21 percent today, thereby crowding out private sector borrowing with negative implications on domestic growth, unemployment levels and inflation.
External debt has been severely constrained in the current year not as a conscious government policy decision but because of failure to reach a staff-level agreement on the ninth review with the IMF that continues to compromise the comfort level of all other sources of borrowing, including multilaterals/bilaterals as well as incurring debt equity through issuance of Sukuk/Eurobonds and borrowing from foreign commercial banks.
And finally, the comparative data is extremely disturbing given that Pakistan’s foreign exchange reserves held by the State Bank of Pakistan were 4,458.3 million dollars in April 2023, against 11,425 million dollars in March 2022, with nearly 5 billion dollar deposits in commercial banks by the private sector in April this year against 6 billion dollars in March last year.
There is a consensus both domestically and abroad that Pakistan will meet all its official debt repayments (principal and interest) till the end of the current fiscal year; however, without the staff-level agreement on the ninth review there is a real danger of official default. At the same time administrative measures remain in place that are curtailing imports, including raw materials/semi-finished products with severe negative implications on the growth rate, and failure though certainly not the intent to borrow from abroad, has generated a surplus current account.
However, by denying that the country is facing a very serious economic impasse today with sustained severe implications on poverty levels, unemployment and inflation, will not make the problem go away. Sadly, Dar’s assessment of the state of the economy, supported only by his party leader Nawaz Sharif, is at an increasing cost to general public well-being as they face diminishing disposable income with each passing day that, in turn, will have serious negative political implications.
There is, therefore, a need to acknowledge the appalling state of the economy today especially in comparison to last year, a state that is the outcome of flawed policy decisions post-September 2022 – a contention premised on the fact that the Fund disbursed the tranche early September last year by combining the seventh and eighth review, increasing the loan amount and extending the scheduled end till June this year, which reflected satisfaction at fiscal and monetary policies in place.
Post-October 2022 the trust deficit with the government economic team widened as flawed policies were implemented accounting for the ninth review staff level agreement still pending. Bravado constantly displayed by Ishaq Dar through maintaining that with or without the Fund tranche release Pakistan will remain afloat is not backed by either out of the box policies currently in place, nor the current macroeconomic indicators and one can only hope that better sense prevails and the cabinet revisits its absolute trust in an economic team that did much damage to the economy in the past and is causing untold hardship to the general public today.
Copyright Business Recorder, 2023