Fine, it was the single biggest one-day jump in the stock market in 15 years. But is it really that unbelievable, even unusual, for the benchmark index and local currency to explode to the upside after a very pleasant, and very sudden, surprise? Especially when failure to conclude the EFF (Extended Fund Facility) was really supposed to mean sovereign default?
What is unusual, even unbelievable, though, is the fact that the PM was able to secure the $3 billion lifeline just when the EFF crashed.
Everybody knows that happened because Islamabad was just unable to implement all the harsh “upfront conditions” that the Fund demanded – structural adjustment and all that – and the new SBA (standby agreement) is also, from what little we know about it so far, about just that – structural adjustment and all that.
So what did the PM promise the IMF chief in Paris that clinched the SBA and made for the perfect optics? We won’t know till, rather if, the IMF board greenlights the facility on 12 July 2023, of course, but it has to be more than everything the finance ministry threw into the EFF and still fell short.
Let’s not forget that EFF failed after all the tax and interest rate hikes and subsidy cuts that ate into businesses and household incomes, which means it brought much misery to the people and still didn’t get the government all the money.
That begs the obvious question of whether markets and business groups clapping for the PM for snatching solvency from the jaws of default continue to cheer if it turns out that all of them would have to offer many more pounds of flesh for the SBA than the EFF, and still have no guarantee that it would be successfully concluded?
The business community might be the first to lose their smiles. BMG (Businessmen Group) chairman Zubair Motiwalla, for example, welcomed the SBA because it would “bring economic stability besides restoring investor confidence, stability in the rupee-dollar parity and positive impact on the stock market”.
Yet he also feared, in the same breath, that “the bailout program may increase the cost of production”, which it most definitely will, and hoped that “the interest rate will also be brought down”, which most certainly will not; otherwise SBP (State Bank of Pakistan) would not have hiked it by 100 basis points in an emergency meeting just days after keeping it on hold in a regular, scheduled meeting.
The most likely best-case scenario is a few-month bull-run in Pakistan’s Eurobonds and equities as sovereign risk premium compresses, the threat of default is kicked further down the road, and China, Saudi Arabia, the UAE, also institutions like ADB, give fresh loans.
But then reality will start to set in because there is still no way the country can pay back $23 billion in external debt in the ongoing fiscal year. Or, for that matter, the $77bn due in the next three years; hence the red flags from both Moody’s and Fitch even as local markets were drowned in euphoria.
Sadly, the government has, and cannot have, anything better on the table than just hope that it will stay on one IMF program or another, which will mean more loans from other bilateral and multilateral sources, which, in turn, will make enough creditors roll over loans year after year to keep escaping default.
And it’s a cruel irony that each tranche of each program will require it to tighten the screws on the people of the country, who make up the world’s fifth-largest population group and had nothing to do with all the wasted and/or looted foreign aid that got the elite penthouses and luxury real estate in Europe and left ordinary Pakistanis with sub-Saharan levels of human development.
The SBA has brought wonderful headlines and made the PM look great. But it won’t help the economy any more than one more bandaid can stop blood from multiple gushing bullet wounds. Its conditions, whatever they turn out to be, are sure to make people’s lives a lot more miserable in return for the faint hope that somebody will give us more money and somebody else will roll over some of our loans to keep us above water.
Pakistan needs a hard reset. With or without the SBA, or even the IMF, it’s well past the point where jokers masquerading as ministers, who ran it into the ground, can steer it forward. It’s also not possible for the 5-year cycle of so-called representative government, where each successive administration takes apart the previous one’s policies, to provide the kind of solutions that are needed.
Yet what that hard reset might look like will have to be the stuff of another column.
Copyright Business Recorder, 2023