Too bad Finance Minister Ishaq Dar didn’t get to give Moody’s a “befitting reply” for downgrading Pakistan’s sovereign credit rating in October, or Fitch would not be teaching Pakistani people and markets a lesson in external sector vulnerability that they will never forget; for no other reason than living and operating in a country where he is finance minister.
It cut Pakistan’s long-term foreign currency issuer default rating (IDR) to CCC- from CCC+ – it’s second downgrade in five months, that too by two notches – because of “sharp deterioration in external liquidity and funding conditions and the decline of foreign exchange reserves to critically low levels”.
This has happened because he not only repeated Hafeez Sheikh and Shaukat Tarin’s mistakes – violating agreed EFF (Extended Fund Facility) conditions by fiddling with taxes and subsidies – but went a step further and interfered in the money market and tried to force up the rupee as well. That’s held up EFF’s 9th review since November and now everybody is talking about default.
But all this is already old news.
The next big question is whether there’s enough road left to swerve around default even if the 9th review is successfully completed in the next few days. Raising taxes, scrapping subsidies and making gas and electricity a lot more expensive, all at once, are no doubt going to be very unpopular steps. But they’re still the easy part and will, no doubt, be pushed through. What happens then is more uncertain.
Pakistan needs to pay back $7 billion in external debt over the rest of the fiscal year. Even if we assume that KSA (the Kingdom of Saudi Arabia) will roll over its $3bn, there’s still $4bn to cough up when reserves are under $3bn. Of this, $1.7bn is loans from Chinese commercial banks, which might not be easy to wriggle out of this fiscal because the government has been trying and failing to get $700 million of it rolled over for three months.
Unfortunately, expected receipts don’t make the picture much better either. Reviving the EFF will unlock $2.5bn from the IMF and $3.5bn from multilateral creditors. Since the current account will need $1-2bn for itself, it’s pretty clear that even the bailout programme will not truly bail us out unless friendly creditor countries are willing to play along and give us more time to pay back their loans; and also give us more loans, of course.
Surely, things wouldn’t have been this tight if Dar weren’t so stubborn and the 9th review was completed when it was due; in November last year. Remittances, too, wouldn’t have dropped to the lowest level since May 2020 if his obsession with artificially propping up the rupee was not allowed to dictate national policy and stretch the spread between interbank and open market dollar rates to historic levels.
In addition to bringing the economy dangerously close to default, the incompetence at the top of the finance ministry has also put the IMF staff’s credibility at risk. When the EFF was revived, on 29 August 2022, Pakistan’s foreign exchange reserves were expected to rise to $16.2bn by June 2023. That’s not going to happen, so Fund officials will have some explaining of their own to do when they take the staff level agreement to their executive board for approval.
There’s also little chance of production and exports picking up anytime soon as IMF’s “upfront conditions” stoke hyperinflation and render local industry uncompetitive in the regional market. Core inflation, which leaves out volatile energy and food prices, is still 19.5 percent in rural areas and 15.5pc in urban centres. And there’s no telling if the Fund will want the next MPC (Monetary Policy Committee) meeting pulled ahead of its due date in March in the rush to achieve a positive real interest rate.
Even if the government is able to do all the Is and cross all the Ts, unleashing a torrent of inflation, unemployment and public disapproval, and put the EFF back on track, there’s still no guarantee the economy will be able to ride out the remainder of this fiscal year unless two, preferably three, friendly countries go out of their way to help us.
And even in that best-case scenario, we’ll need another front-loaded IMF programme as soon as this one ends. So it’s not really clear if the government has just taken too long to do the right thing and accept the Fund’s harsh conditions or if it is already too late to avoid default.
That’s not what was promised when a special jet was sent to fetch Dar from intensive care in London.
Copyright Business Recorder, 2023