Pakistan’s external financing needs

15 Nov, 2023

EDITORIAL: The outgoing Shehbaz Sharif-led government budgeted 24.2 billion dollar external loans for the current fiscal year – 6,874.4 billion rupees at the exchange rate of 284 rupees to the dollar with 5,510.580 billion rupees (19.4 billion dollars) programme loans defined as budget support. Project loans were budgeted at 592.48 billion rupees (2 billion dollars).

Pakistan is currently on its twenty-fourth International Monetary Fund (IMF) programme and given that the identified budget support is premised on budgeted expenditure and revenue it is little wonder that multilaterals, including the IMF, now insist on upfront extremely harsh time-bound conditions and structural adjustments in persistently poorly performing sectors (particularly tax and power) - politically challenging conditions that were either not implemented in the past leading to programme suspension or simply reversed once the programme was completed.

In recent years bilaterals, including friendly countries, have publicly shown a reluctance to release pledges unless Pakistan is on a strictly monitored IMF programme with the objective of no longer agreeing to throwing good money after bad.

Once the staff-level agreement on the first review of the Stand-By Arrangement (SBA) is reached, as anticipated, budgeted external inflows from multilaterals and bilaterals are expected to continue to be disbursed.

It needs reminding that in spite of efforts by the then Finance Minister, Ishaq Dar, to access the pledges without implementing Fund conditions, the pledges remained undisbursed till the signing of the SBA agreement.

While a section of the media has reported that the Fund mission has contacted bilaterals directly to reconfirm their pledges yet two observations need to be highlighted. First, in the past being on an IMF programme automatically led to an improved rating by the three main international rating agencies – Standard and Poor’s, Fitch and Moody’s.

Unfortunately, even after the staff-level agreement was reached under the SBA on 29 June 2023, there has been no improvement in the country’s rating which implies access to loans from commercial banks abroad or incurring debt equity through issuance of sukuk/Eurobonds will be at unaffordable rates of return.

The government budgeted 1305 billion rupees as commercial loans from the banking sector abroad and another 435 billion rupees through issuance of Sukuk/Eurobonds or a total of 6.12 billion dollars – an amount which has not yet been realised.

And second common sense dictates that failure to generate 6 billion dollars must be accompanied by appropriate changes in the budget – a reduction in the current expenditure, which was inexplicably raised by 26 percent against the revised estimates of the year before in spite of the extremely narrow available fiscal space and/or increase revenue generation through reforming the tax structure that at present remains skewed in favour of the elite as indirect taxes, whose incidence on the poor is greater than on the rich, account for 60 percent of total tax collections while 75 to 80 percent of direct tax collections are in the indirect tax mode (withholding taxes on products) which Federal Board of Revenue continues to misrepresent in spite of an exhortation by the Auditor General of Pakistan not to do so.

It is important to note that Pakistan’s economy is not out of the woods yet and the resulting pain is particularly acute for the poor and the vulnerable.

While the caretaker economic team is rightly focused on the success of the first SBA review, which appears on course, yet there is a need to revisit the budgeted revenue and expenditure items through widening the tax net, implementing pension reforms to ensure employee contributions and seek voluntary cuts in the budgeted allocations for current expenditure from all major recipients.

If the caretakers succeed in enforcing these measures they would go down in our history as the team that made the difference.

Copyright Business Recorder, 2023

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