EDITORIAL: Moody’s Investor Service, one of the three major international rating agencies, has kept Pakistan rating unchanged at Caa3 with a stable outlook stating that “the forthcoming coalition government’s electoral mandate may not be sufficiently strong to pursue difficult reforms that will likely be required by a successor (International Monetary Fund) programme.

Until a new programme is agreed to, Pakistan’s ability to secure loans from other bilateral and multilateral partners will be severely constrained.” This statement elicits four annotations.

First; while there is a consensus that the coalition government will be weak yet three significant factors, prevalent in most of the past twenty four Fund programmes by our administrations, civilian and military, are clearly not taken into account in Moody’s analysis: (i) economic policies have changed little, a fact which accounts for a steady rise in the energy sector circular debt, dealt with by raising utility tariffs and keeping the tax structure severely skewed in favour of the rich through heavy reliance on indirect taxes as a source of revenue, instead of implementing structural reforms agreed under the programmes; (ii) continuing the elite capture in terms of the budgeted revenue and expenditure allocation though different administrations mollycoddled different elite groups and this in spite of pledges to bilaterals/multilaterals to end this morally repugnant capture – an element that accounts for the rigid upfront conditions in the last two Fund programmes – the 2019 Extended Fund Facility and the 2023 Stand-By Arrangement (SBA); and (iii) stakeholders do not only include the three universally acknowledged pillars of government notably the executive, the legislature and the judiciary but also our defence forces and, in more recent years, the emergence of a hybrid system has led to the establishment of structures where ground realities are better reflected - a recent example being the establishment on 17 June 2023 of Special Investment Facilitation Council (SIFC) which, in turn, may imply that a weaker government may more easily proceed with politically challenging reforms rather than a strong government that may be able to withstand overt or covert pressure.

Second; domestically it is being assumed that the thinking in the corridors of power today is that Shehbaz Sharif, sans the then Finance Minister Ishaq Dar, succeeded in securing the nine-month 3 billion dollar SBA with the Fund and as the next most likely prime minister will be able to secure another longer term Fund programme.

Thirdly; Moody’s defines a Caa3 rating as being within the speculative grade with obligations judged to be of poor standing and subject to a very high credit risk.

This implies that Pakistan’s capacity to borrow from the commercial banks abroad or indeed issue debt equity (sukuk/Eurobonds) at reasonable rates of return would be severely compromised with the extent of the compromise dependent on the budgeted reliance on these two sources of borrowings.

The budgeted amount from these two sources in the current year is 6.1 billion dollars and so far this entire amount remains unrealised. It is relevant to note that the PML-N (Pakistan Muslim League-Nawaz) administration (2013-18) increased reliance on borrowing from commercial banks abroad (by inanely arguing that their rate of interest on offer was lower than by domestic banks, thereby completely ignoring the fact that while domestic borrowings do fuel inflation yet they do not generate a severe current account imbalance that reached a historic high of 20 billion dollars in 2018) as well as issued sukuk/Eurobonds.

One can only hope that the expected Shehbaz Sharif-led government would desist from following this policy and that the budget for 2024-25 would not rely on these two extremely expensive sources of borrowings. This in turn would require curtailing current expenditure that would necessitate voluntary sacrifices by the major budget recipients as well as structural reforms.

And finally, what is so far unclear is the extent of nationwide protests against the “controversial” elections. In the event that protests become widespread with the discontented political parties succeeding in mobilising the public labouring under a prohibitive rate of inflation for the past two years which has led to major revisions in the kitchen budgets of the bulk of the population, the situation may become difficult to control in which case Moody’s dire prognosis about political uncertainty contributing to inability to implement reforms would assume relevance.

What is baffling in our fledgling democratic set-up is that while it is fairly obvious that implementing structural reforms would strengthen the popularity of the ruling party, reforms inclusive of placing the onus of full cost recovery on improving sector efficiencies/dealing with corruption and raising reliance on direct taxes based on the ability to pay principle, yet administration after administration has resisted these reforms.

Many argue that this reflects long-standing ground realities, however, one would hope that given the recent over-arching objective of turning the economy around this mindset undergoes a change not only in the supreme national interest but also to ease the pressure on the growing poverty levels in this country, which was estimated at a disturbing 40 percent last year.

Copyright Business Recorder, 2024


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