Economic Affairs Division in its foreign economic assistance (FEA) data disclosed a 58 percent rise in foreign loan inflows in the first quarter (July-September) of the current fiscal year compared to the comparable period of the year before – 3.527 billion dollars against 2.234 billion dollars.
The first tranche release under the International Monetary Fund’s (IMF’s) ongoing Stand-By Arrangement (SBA) of 1.2 billion dollars and the one billion dollars from the United Arab Emirates was not included in the FEA.
Foreign inflows from multilaterals and bilaterals are the outcome of confidence in the debtor country’s reform agenda. It is therefore little wonder that inflows began or rather were restored as soon as three major prior conditions were implemented, which subsequently led to the staff level agreement announcement on the Fund’s website on 29 June 2023: (i) controlling the interbank rupee rate was abandoned and a market based exchange rate mechanism restored; (ii) a circular by the State Bank of Pakistan was issued lifting restrictions on imports, originally imposed due to worrisomely low foreign exchange reserves; and (iii) the tax revenue target as declared in the 9 June budget 2023 for the current year was upped by 200 billion rupees.
A timeline to economic decisions during the 16-month tenure of the Shehbaz Sharif-led government is important to understand why the Fund insisted on the implementation of the prior conditions before launching the SBA while concurrently suspending the Extended Fund Facility (EFF) programme with two tranches remaining undisbursed due to failure to abide by the agreed conditions.
In August 2022 the then Finance Minister, Miftah Ismail, successfully negotiated a seventh/eighth review under the then ongoing EFF. Implicit in the success of a Fund review is approval of a forthcoming budget and Pakistan’s budget for 2022-23 presented on 10 June 2022 was reviewed by the Fund which led to a tranche disbursement by September 2022.
The budget projected total external loans required for the year at 3.166 trillion rupees based on the rupee-dollar parity of 183 rupees – approximately 17 billion in dollar terms. However, by the end of the fiscal year the average rupee-dollar parity was determined at 204.5, or a differential of 21.5 rupees to the dollar from what was budgeted, thereby indicating that the 17 billion dollars equivalent in rupees had risen to 3.476 trillion rupees by year end.
Miftah Ismail is however on record as stating that around 30 to 35 billion dollars would be required to ensure sufficient foreign exchange for not only meeting past debt obligations, but also for balance of payment support and to strengthen foreign exchange reserves: around 21 to 22 billion dollars were earmarked for repayment for past debt obligations (including interest payments on sukuk/Eurobonds), another six to seven billion dollars for budget support and the rest for strengthening foreign exchange reserves.
Bafflingly, the budget for the current year presented by Ishaq Dar noted 2022-23 budgeted reliance on external resources at 5.503 trillion rupees, amounting to 30 billion dollars for last fiscal year as per the then rupee-dollar parity, instead of the actual budgeted amount of 3.166 trillion rupees.
And revised the amount downward to 3.208 trillion rupees, which amounts to actual inflows of 15.6 billion dollars. The reason: Dar’s violation of August 2022 agreements with the Fund led to cessation of all foreign inflows after he took oath as the finance minister on 27 September 2022.
What needs to be highlighted is the fact that the growth rate for 2022-23, estimated at negative 0.5 percent by the World Bank with the government estimating it at positive 0.3 percent, against the budgeted projection of 5 percent was in spite of Dar not implementing the Fund conditions from October 2022 till the staff level agreement on the SBA was reached on 29 June 2023. In other words, Dar’s claim that the fault for the poor performance of key macroeconomic indicators must be laid at the doorstep of the previous administration’s acceptance of the IMF’s harsh upfront conditions or on the IMF presents a claim that is simply untenable.
Dar presented the budget for 2023-24 on 9 June this year and earmarked 6,874,426 million rupees from external sources – an amount that was inexplicable as it was set at a time when all inflows were frozen due to the suspended EFF, including from friendly countries.
This led to a lower rating by international agencies, which, in turn, disabled the government from negotiating loans from the commercial banking sector abroad as well as through incurring debt equity (through issuance of sukuk/Eurobonds) at reasonable rates.
Foreign loans are thus back on track with the signing of the SBA – budgeted amount of external loans was 6,874,426 million rupees with 5,510,580 million rupees programme loans (budget support) or 80 percent of the total with the bulk earmarked for current expenditure, a highly inflationary policy, with the rest project loans.
The rate of exchange is budgeted at 284 rupees to the dollar for the current year which effectively implies total reliance in dollar terms of 24 billion dollars. The rupee equivalent will have to be adjusted in the event that the exchange rate fluctuates from what was budgeted.
To conclude, there is an ever-rising need to slash expenditure, especially current expenditure whose recipients are the influential with a little trickling down to the downtrodden – 471 billion rupees for Benazir Income Support Programme (BISP) and one would hope that the untargeted subsidies of one trillion rupees for the current year would begin to be channeled through BISP as recommended by the multilaterals which if implemented would account for 10 percent of total budgeted expenditure of 14.46 trillion rupees for the poor.
However, BISP allocation alone accounts for a paltry 3.2 percent of total expenditure grossly insufficient to meet the needs of the 40 percent of the people living below the poverty line.
Copyright Business Recorder, 2023
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