‘Plan B’ was announced amid much fanfare, backed by the civilian administration (federal and provincial) and military leadership this Tuesday past premised on a one-window operation tried and failed in the past a number of times but failure attributed to bureaucratic and/or legal obstructions.
‘Plan B’ envisages capitalizing on untapped potential in key sectors (defence, agriculture/livestock, mining/minerals and energy), which is known to be significant, through indigenous development mainly through investments from friendly countries. It is as yet not clear how indigenous development will be defined and whether domestic investors will be allowed to participate.
The difference from past implementation of one window operations, as per Musaddak Malik, Minister of State for Petroleum, apparently selected to be the defender of ‘Plan B’, is to elevate ‘Plan B’ to the level of the executive, with the Prime Minister chairing regular council meetings with the next tier to be headed by the Minister for Planning, Development and Special Initiatives, Ahsan Iqbal – the two tiers tasked to resolve any lacunas that may erupt within the implementation committees that would be established for each sector/sub-sector dedicated to supporting the one window operation in that particular sector/sub-sector.
The military has pledged security to the investors, a key ingredient that is required given the rise of terror related incidents in the country in recent months. The Plan so far shared with the public requires an emergent answer to three questions.
Assuming smooth sailing of the Plan how much time will be required for it to bear fruit? Can any policy designed to attract investment, particularly foreign direct investment, not take into account the country’s general macroeconomic condition? And finally, can ‘Plan B’ be a replacement for ‘Plan A’ which is to implement prior conditions to reach a ninth review staff level agreement with the International Monetary Fund (IMF) that would have unlocked access to the 2023-24 budgeted 10 billion dollars: 696 billion rupees from the IMF, 1.305 trillion rupees from commercial banks abroad and 435 billion rupees from issuance of Eurobonds/sukuk?
Musaddak Malik has cited the figure of 112 billion dollar of inflows under this initiative (25 billion dollars from Saudi Arabia and 22 billion dollars from the UAE) though Shahbaz Sharif scaled down expectations to 5 billion dollars increase in foreign direct investment though both men did not mention the projected time period to realize this amount. Given that Reko Diq, a long pending project, was estimated at over 56 billion dollars in 40 years at copper and gold prices that date back a few years, the effectivity of Plan B is at best in years if not decades.
Malik publicly stated that the three friendly countries – China, Saudi Arabia and the United Arab Emirates, have already indicated an interest in investing in these key sectors. China under China Pakistan Economic Corridor (CPEC) directly invested between 26 billion dollars to over 60 billion dollars (the exact amount remains unclear) mainly in the energy sector and construction of highways.
CPEC was launched in 2015 and the investment spans eight years. Recent reports indicate that the failure to meet our contractual obligations has made the Chinese insurance provider, Sinosure, reluctant to approve the second phase of CPEC projects, without whose consent no Chinese company can invest/launch a project. Pakistan established an escrow account of 50 billion rupees in November 2022 to ease Chinese concerns over the commitment to meet these obligations but the amount is far less than the actual dues even though it does place China in the front of the queue of other debtors.
It is not clear whether the lease of four out of 33 berths at Karachi port to the UAE for 220 million dollars and 4.68 billion dollars Pakistan and China deal to build a 1200 MW nuclear power will be included in the projected Plan B inflows of 112 billion dollars. However, these amounts will flow into Pakistan in phases.
Saudi Arabia, in February 2019, pledged investment deals of 20 billion dollars that included 8 billion dollars in an oil refinery in Gwadar – a pledge that has yet to be realized. On 24 August, 2022 Saudi state media reported that “the Custodian of the Two Holy Mosques, King Salman bin Abdulaziz Al Saud issued a directive to invest one billion dollars in Pakistan;” and by January 2023 a statement from Saudi Arabia noted that the Saudi Fund for Development will conduct a study on increasing the deposit in Pakistan’s central bank to 5 billion dollars from 3 billion dollars (not yet implemented) and assess a plan to increase investment to 10 billion dollars (half the amount pledged to the Khan administration).
The UAE in October 2019 pledged investment of 5 billion dollars which has yet to be realized while on 19 May 2023 a UAE delegation pledged 2 billion dollars of investment in Pakistan.
It is unclear whether Plan B will distinguish between deposits (agreed under the IMF programme which all three friendly countries have publicly indicated are to be linked to remaining on a Fund programme to ensure that reforms are implemented with the objective of making good use of the borrowed funds, and their own government/private sector supported investments.
Be that as it may, it is fair to assume that no government or a private sector company will invest large sums over-night and will not only take cognizance of the possibility of a change in administration given that the current parliament ends its natural term on 13 August this year, less than two months from now, but also carefully review the investment climate based not only on the security situation but also on key macroeconomic fundamentals.
These fundamentals remain extremely weak with foreign exchange reserves no more than 4 billion dollars as on 9 June 2023 (under 4.6 billion dollars since January 2023) which compelled the government to sustain harsh administrative measures for a year now which have compromised foreign companies’ capacity to repatriate profits and/or import key inputs.
And while the current account deficit has been contained due to these measures yet their impact on large scale manufacturing growth is disturbing, which registered negative 8.1 percent (July-March 2023) though the negativity has considerably increased in recent months, registering negative 11.6 percent in February and negative 25 percent in March.
And if one adds the continuation of two severely flawed policies to this day notably controlling the interbank rupee dollar parity and borrowing heavily from the domestic market for current expenditure, a highly inflationary policy, then one has all the markings of an investor, domestic and foreign, assessing whether the policies are right for investment in Pakistan.
And finally, Plan A has been all but abandoned it appears, as the IMF programme remains stalled – a plan which would have guaranteed the budgeted 10 billion dollar inflows almost immediately. And deferred impending default implicit in the data contained in the budget documents: 23.7 billion dollar external inflows required at the unrealistic rate of 290 rupees per dollar with 15.4 billion dollars required for foreign loan and repayments and repayment of short term credit.
The remaining 8.3 billion dollars is critically required to fund the 26.5 percent rise in the budgeted current expenditure from the revised estimates of last year as well as strengthening the appallingly low foreign exchange reserves of 4 billion dollars as of 9 June 2023 which are insufficient to meet two months’ of imports that would in turn put pressure on the rupee-dollar parity.
To conclude, it is very disturbing that the Finance Minister continues to be vigorously defended by his party leaders and is being allowed to continue implementing flawed policies that are pushing the economy deeper into the quagmire that would considerably lengthen the recovery period to three to four years at least.
Copyright Business Recorder, 2023