EDITORIAL: Rating agency Moody’s has warned that Pakistan’s liquidity risks remain high in spite of the staff-level agreement with the International Monetary Fund (IMF) – for a Stand-by Arrangement of 3 billion dollars for a nine-month period.
This view is fully supported by Business Recorder and independent economists, with the only exception being the economic team of the federal government and the shrinking number of people that support their stance whether in the bureaucracy or the PML-N (Pakistan Muslim League-Nawaz).
The obvious reason: 4,069 million dollar foreign exchange reserves are simply not enough to meet even one month of imports (the total June 2023 imports as per the Pakistan Bureau of Statistics (PBS) were of 4,180 million dollars), 3.68 billion dollar estimated decline in remittance inflows (due to the finance minister’s disastrous policy to control the rupee-dollar parity in spite of appallingly low foreign exchange reserves), clocking at 24.8 billion dollars July-May 2023 compared to 28.48 billion dollars during the comparable period the year before.
Besides this decline in exports, home remittances by the Pakistanis abroad, the other desired form of foreign exchange earnings, also fell from 31,782 million dollars July-June 2022 to 27,744 million dollars in 2023 (a decline of nearly 13 percent).
Moody’s assessment is also supported by the budget 2023-24 documents that envisage external borrowing of around 23 billion dollars at the rupee dollar parity of 290 (which may require an adjustment based on the average rupee-dollar parity for the current year) to meet obligations of interest on foreign loans and repayments of due instalments and also repayments of short-term credits itemised at 15.4 billion dollars.
The remaining 8.4 billion dollars is budgeted to meet the country’s import needs (including fuel for the power sector, the reason behind massive power load-shedding today), the fiscal deficit projected at 6,924 billion rupees (6.5 percent of GDP), an estimate whose credibility would be evident at the end of the year, since past precedence reveals that the GDP budget estimate is routinely overstated while the fiscal deficit and trade deficit understated.
The nine-month 3 billion dollar Stand-By Arrangement (SBA) with the Fund has without doubt strengthened the external value of the rupee, raised domestic stock market confidence that accounts for the bullishness in the bourse today, and significantly upped the bond returns from 36 to the dollar to nearly 76 to the dollar.
Notwithstanding the fact that these upswings are greatly appreciated, comforting and may be a harbinger of an economic revival; however, two disturbing factors are evident.
First, that the SBA alone will not end the country’s heavy dependence on external borrowing as repayments of past loans are estimated at between 23 to 25 billion dollars every year for the foreseeable future or, in other words, the authorities will have to seek another loan from the Fund that alone would unlock bilateral and multilateral assistance as the defunct Extended Fund Facility unambiguously brought home to Pakistani officialdom.
And secondly, in spite of the staff-level agreement for which credit must be laid at the doorstep of the Prime Minister and all those that he graciously identified and praised for their contribution towards this end, all subsequent positive indicators do not impact on the common man in this country grappling with a very low growth rate, high inflation and rising unemployment.
Since the staff-level agreement has not yet uploaded, as Moody’s correctly points out, it is unclear whether the full 3 billion dollars would be disbursed within the nine months, given that Pakistani authorities will have to meet harsh upfront prior conditions.
This concern is exacerbated by the capacity of the interim government, based on its constitutional mandate, to meet agreed revenue targets in case of a shortfall by taking corrective measures (a shortfall is a distinct possibility given the overestimation of the budgeted growth rate, the likely impact of a raise in the price of key inputs on products, including electricity and gas, and therefore on exports and the paucity of dollars crippling the ability to import critical items or to reduce the 26.5 percent budgeted rise in current expenditure in comparison to the revised estimates and nearly 53 percent in comparison to the 2022-23 budget.
The way forward, therefore, is to implement crucial structural reforms, particularly in the power and tax sectors as well as improve governance of state run enterprises that have been resisted by all administrations, civilian and military alike, that would ensure that the country can be weaned out of its dubious status of being a perennial IMF borrower and forge ahead economically on its own steam.
Copyright Business Recorder, 2023
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