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Counting the ways to borrow

Pakistan’s policy thrust today to get out of the ongoing very serious economic/financial imbroglio is, heads: seek more loans at the least possible cost; tails: seek more loans at the least possible cost. The cost is defined in terms of the interest applicable/amortization period for the loan and the politically challenging structural adjustments/time bound conditions agreed with creditors.

The eleven-party coalition government is focused on seeking immediate disbursement of pledged 4.2 billion dollar additional loans from the three friendly countries – China, Saudi Arabia, and the United Arab Emirates (UAE). Disturbingly though the recent hectic civilian and military diplomatic efforts have failed, reflected by declining foreign exchange reserves with all three countries reportedly linking additional pledged disbursements to the success of the pending ninth IMF review.

Pakistan’s appallingly poor record during the previous twenty-two IMF programmes to implement agreed structural reforms and time-bound quantitative conditions have directly contributed to the present economic crisis and the Fund, therefore, has legitimately refused to give any leeway to the finance minister Ishaq Dar-led team, in phasing out the harsh upfront conditions, the hallmark of the ongoing twenty third programme barring the one and a half years of the global pandemic. This rigid stance is being echoed by Pakistan’s other multilateral/bilateral donors. UK Minister of State for Development and Africa Andrew Mitchell urged Pakistan to put its own house in order during the flood conference held in Geneva in the first week of January this year while the Saudi Finance Minister al-Jaddan stated last week during the World Economic Forum at Davos that “we used to give direct grants and deposits without strings attached and we are changing that. We need to see reforms. We are taxing our people, we are expecting also others to do the same, to do their efforts. We want to help but we want you also to do your part.”

Reports suggest that the Dar team remains focused on raising revenue by upping electricity and gas tariffs, which would effectively pass on the entire buck to the consumers without dealing with its own sectoral inefficiencies, and the passage of a mini-budget with an eye only on the low hanging fruit, indirect taxes, whose incidence on the poor is greater than on the rich to meet the revenue shortfall. It is little wonder that analysts caution that the existing policies are sustaining the stranglehold of elite capture of our scarce resources and the prospect of civil unrest is looming ever larger on the horizon.

Issuing sukuk/Eurbonds, a source of debt equity, that the incumbent finance minister relied heavily on during his 2013-17 stint at rates at least 2 to 3 percent above those on offer by the then debt ridden Greek government are not likely to be available at a reasonable rate after Moody’s Investors Services downgraded Pakistan’s credit rating to Caa1 from B3 on 6 October 2022 while maintaining that “the Caa1 rating reflects Moody’s view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs.” Moody’s decision predated the delay in the ninth review scheduled for 3 November and pending to this day.

The most expensive with a very short term amortization period is borrowing from commercial foreign banks. Last fiscal year (July-June 2021-22) Pakistan accessed 4.873 billion dollars from commercial banks. July-November 2022-23 data released by the Economic Affairs Division noted 200 million dollars against the budgeted 7.5 billion dollars borrowed from foreign commercial banks though unlike in the past there was no mention of which bank(s) lent this amount; however unconfirmed reports indicated that it was refinanced from China.

In November Ishaq Dar was in Dubai and reportedly met with management of leading banks identified as Dubai Islamic Bank, Ajman Bank and Emirates NBD and the following statement was issued by the Finance Ministry: “commercial banks reposed confidence in the current economic policies of Pakistan and assured their continued support”. The vote of confidence claimed by the Ministry of Finance has not been backed by disbursement of a loan.

Domestic borrowing over external borrowing is preferred by many a domestic economist arguing that this can be dealt with more easily through printing more money (a highly inflationary policy). The Khan administration raised borrowing domestically from 16.5 trillion rupees to over 27 trillion rupees. The incumbent government has been unable to generate interest due to the offer of a yield lower than the discount rate. Be that as it may, there is no doubt that owing money in dollars to foreign creditors has historically been particularly onerous for Pakistan due to three recurring and not dealt with issues that, in turn, led to frequent balance of payment problems compelling the country to seek an IMF programme again and again. First, exports remain traditional and increase in exports last year was due to a rise in international prices and not volume. The 6 October 2022 unfunded electricity subsidy of 110 billion rupees to exporters, without any empirical evidence that such a subsidy will raise exports, termed a regressive measure by the IMF would have to be reversed if the ninth review is to be successful without which default does loom large on the horizon. On 16 January Dar tweeted: “export industry is one of Highest Priority of our Govt. Five previously zero- rated export oriented sectors and all other exporters will be given complete facilitation for import of raw materials, spare parts and accessories to meet their export requirements” – an objective that is being severely compromised by Dar’s support for a controlled interbank rate, again opposed by the IMF and violative of the pledge repeatedly made by the country’s successive economic team leaders to the Fund during the ongoing programme.

Second, there are three prevailing rupee-dollar rates with the differential as high as 35 to 40 today and rising – interbank, open market and open market at which dollars are actually available. This flawed policy is the reason behind declining remittance inflows (by about one billion dollars in July-December 2022 against the same period of 2021) as overseas Pakistanis revert to using the hundi/hawala system instead of the official channels. Reserves on 6 January were at a low of 4.343 billion dollars held by the State Bank of Pakistan, not enough to meet a month of imports raising the possibility of default not only by members of the Pakistan Tehreek-e-Insaf (PTI) but also by independent economists.

The Finance Minister’s economically inexplicable take on this genuine concern was to state that Pakistan’s foreign exchange reserves stand at 10 billion dollars and not 4.6 billion dollars (as on 13 January) as around 6 billion dollars are held by commercial banks. The international practice followed by all multilaterals including the IMF as well as economists world-wide is to consider only reserves held by the apex bank as the country’s foreign exchange reserves. Dar’s claim brought up painful memories of the PML-N government’s decision after the 28 May 1998 nuclear blasts to freeze foreign currency accounts held by commercial banks and allow only rupee withdrawals from these accounts. Dar defended his statement but wisely followed it by denying any intent to freeze foreign currency accounts: “national foreign exchange reserves always include forex held with SBP and commercial banks. Recently I quoted the forex reserves figure based on this principle. Some vested elements who ruined this country’s economy in the past gave it a deliberate twist and started a campaign as if the government was considering access to foreign exchange held with commercial banks which indeed is the property of citizens. It is categorically denied and clarified that there is no such move under consideration by the government. Therefore such misconstrued, misinterpreted and mala fide propaganda should be ignored. Pakistan is moving towards improvement in its forex reserves position in the near future In Shaa Allah.” Sadly, not true and not happening.

And finally, the government needs to slash current expenditure and refrain from slashing Public Sector Development Programme – the only main source of growth in the current year especially after Large Scale Manufacturing registered negative growth of 3.58 percent July-November 2022.

To conclude, while the Dar-led team has effectively passed on the entire blame for the current impasse on the deal signed with the Fund by the previous administration yet the contribution of the incumbent team’s deeply flawed policy decisions are being overlooked. One would hope that the stakeholders realize that it is not only about the harsh Fund programme but also decisions subsequent to the advent of Ishaq Dar on the scene that need to be immediately reversed – decisions that are deepening the economic impasse and are clearly violative of pledges made to the IMF in the seventh/eighth review particularly exchange inflexibility and extending unfunded subsidies to the non-poor.

Ajunum Ibrahim, "Counting the ways to borrow," Business recorder. 2023-01-23.
Keywords: Economics , Financial issues , Structural reforms , Economic challenges , Commercial banks , Public Sector , Fund programme , Ishaq Dar

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