Magda Lipan*
Investor’s confidence in Pakistan’s ability to pay back loans and bonds is dwindling with the economy in a state of free-fall, and the weak coalition government of Prime Minister Shehbaz Sharif helpless to stop it. With every passing day. Medium and even near-term risks are increasing as the bail out talks with the IMF are nowhere on the horizon while the Yuan package promised by Beijing months ago remains a post-dated cheque.
Neither the creditors nor the market is impressed by the official assertions that the land of the pure will not default and will meet its upcoming $1 billion dollar bond payments. This money, first in a series of repayments, needs to be repaid on December 5 against the maturity of five-year Islamic bonds.
The apex bank governor, Jameel Ahmad’s has presented data on the health of Pakistan rupee before the media but sceptics have pooh-poohed his claim that the country has “enough dollars to meet its foreign debt obligations.”
With the finance minister Ishaq Dar busy battling what is clearly a losing battle to pop up the rupee vis-à-vis the American dollar, the Planning Minister Ahsan Iqbal, has come up with a political spin to rubbish market perception.
Speaking at Jeddah, the Saudi port city on the Red Sea, he attributed the “rumours related to default risks” to the malicious campaign of former Prime Minister’s Pakistan Tehreek-i-Insaf, (PTI) party.” He has not takers clearly because the country’s 5-year credit default swap, CDS, (an indicator used to insure against debt restructuring or default), has widened to 75.5% from 52% within the past fortnight. The CDS hovered around 5% to 6% before the Covid-19 outbreak in February, 2020.
The charismatic Imran Khan has been raising alarm bells over the ‘perilous’ state of the economy particularly the difficult balance of payment (BoP) situation. Leading a Long March to Islamabad to press for early polls, he has been telling the swelling crowds that the country’s default risk was a “mere 5pc” when he was in power earlier this year, according to The Express Tribune, a leading English daily published from Karachi in collaboration with The New York Times.
Pakistan’s BOP problem is so serious that a reduction in current account deficit might not be enough to steer the country out of the crisis. Its foreign debt repayment obligations are estimated at $32 – $34 billon for this fiscal year. Pakistan has to shore-up $23 billion at an average of over $3 billion per month.
Both Moody’s and Fitch have downgraded the Pakistan’s scrip highlighting its elevated risk of default. Pakistan’s central bank tried to put in some correctives at the expense of economic activity. Stringent import curbs, and delayed profit repatriation have checked out go of forex reserves to an extent even as the Pakistan rupee steeply depreciated in value. Today an American dollar fetches around 220 rupees. This situation is despite the promised multilateral inflows from the ADB and World Bank.
According to the Planning Minister Ahsan Iqbal, Pakistan would require $100 billion in the next five years to get rid of financial woes. This is in addition to two other burdens – China’s State Administration of Foreign Exchange, SAFE Deposit of $4 billion, and Time Deposits of $3 billion by the Saudi Fund for Development, which are rolled over on annual basis. The Shehbaz government has raised $18.03 billion to meet its external debt obligations in FY 2021-22.
The dire economic conditions should have pushed the ruling coalition to implement serious structural reforms, raise tax base particularly on the real estate, and privatise at least the loss-making state enterprises, besides the long overdue energy sector reforms. It has not. There is a policy paralysis amidst a daily dose of rosy talk.
The Pak elite are given 17 and half billion dollars a year as handout, according to the UNDP. The city of Pune, known as the Oxford of the East, in India, raises property taxes more than that in the entire province of Sindh, which is home to the commercial/financial capital of Pakistan, according to DawnNews TV. Clearly what Pakistan needs is political will to mobilise revenues and to cut expenditure which alone can help the country to end its economic woes once for all.
Friendly nations appear unprepared to lend a helping hand on account of the political turmoil created by Imran Khan’s Long March. If political uncertainty is not defused, economy cannot be revived. Ishaq Dar, who was brought in to head the finance ministry this September, had promised to fix the falling value of the Pak Rupee (PKR) and bring down inflation. But his magic wand has not worked. Instead, the threat of default is back.
The finance minister spoke of billions of dollars in financial support coming from China and Saudi Arabia. This has not materialised, raising questions about his credibility. He tried to persuade international bankers to offer a rollover of commercial debt but drew a blank.
The lender of last resort, the International Monetary Fund (IMF) is not happy with Pakistan for missing crucial programme targets. This is clear from the delay of the 9th quarterly review of the Extended Fund Facility (EFF) amid government’s request for a series of waivers on performance criteria owing to flood losses and the Fund’s push for sticking to committed tax-to-GDP ratio of at least 11%. The backtracking on the IMF agreement may block the expected inflows from multilateral institutions.
The fact that no new investment seems to be coming means that economic growth could go down further. According to the Central Bank, SBP, foreign investment was reduced by 47% in the first quarter of the current financial year. The commercial bank deposits continue to drop. It registered a decline of 1.8% in October to Rs 22.41 trillion from the previous month. There is also the danger of a down slide in the inflow of remittances, as the current global conditions are squeezing the income of Pak diaspora, and workers alike.
As the Parliamentary Standing Committee has observed, Pakistan cannot hope for its economic nirvana with its soaring inflation, political instability and increasing poverty. Yet, there is no serious thinking to stop the slide. The forthcoming debt repayment obligations will make the prospects for the Pak scrip very bleak. (POREG)
—* The writer, a Boston-based consultant is a regular Poreg contributor