During the ongoing World Bank/International Monetary Fund (IMF) spring annual meeting Gita Gopinath, the First Deputy Managing Director of the IMF noted that 15 countries are in debt stress, 45 percent of low income countries are at high risk of debt stress and 25 percent of emerging markets are borrowing at very high interest rates.
Debt restructuring, she added, is no longer easy as the group of creditors have changed since the 1980s – no doubt a reference to China.
Pakistan can be placed amongst the 25 percent of low income countries at high risk of debt stress as well as one of the 25 percent of emerging markets facing borrowing at very high interest rates.
The country is not one of the five emerging markets notably Brazil, India, China, South Africa and Russia (with an obvious change in the Russian position due to Western sanctions); however, Goldman Sachs defined Pakistan as an emerging economy in its list of the next eleven countries.
The country’s foreign exchange reserves are at a low of 4038.3 million dollars as of 7 April 2023, an amount that may not be sufficient to meet the import needs of the country for a month given the rising international price of grains and petroleum and products due to the ongoing Ukraine-Russian war. With one billion dollar Eurobonds (debt equity) due this month reserves are expected to decline to the dangerously low level of 3 billion dollars assuming, unrealistically, that no other net dollar outflows are likely this month.
Debt equity is a component of Pakistan’s debt profile, that has accumulated since 2013-17 (the PPP-led government had desisted from issuing sukuk/Eurobonds as it considered the costs too high), when Pakistan’s economic crisis had yet to reach a boiling point though work towards that objectionable objective was continuing at a fast clip. This period was witness to the issuance of Eurobonds at a yield well above the then international market rate - at 8.5 percent, higher than what was available to a cash-strapped Greece, while sukuk was issued at 6.5 percent.
The then finance minister Ishaq Dar’s economically inane rationale at the time: it is cheaper to borrow from abroad than domestically (the then prevailing rate was 12 percent) and by pumping the borrowed dollars into the market to control the rupee rate he played havoc with the country’s current account deficit and remittance inflows while artificially narrowing the budget deficit.
Given that all three international rating agencies have downgraded the country’s rating to almost junk status, today it is next to impossible to issue sukuk/Eurobonds or procure foreign commercial loans at even remotely economically viable/affordable rates.
Multilateral/bilateral assistance remains locked pending the success of IMF’s ninth review which in turn is awaiting written assurances from the three friendly countries (China, Saudi Arabia and the UAE) that their already pledged assistance will remain on course till programme end (scheduled for end June 2023 if there is no further postponement).
This has reportedly been secured prompting the Finance Minister to loudly proclaim that the ninth review is imminent; however, considering that he has been claiming precisely that since 10 February 2023 (the day of the departure of the Fund team) many are keeping their fingers crossed.
On 1 March 2023 Moody’s identified Pakistan’s external financing needs: “the government will need to obtain the roll-over of the $3 billion China SAFE deposits and secure $3.3 billion worth of refinancing from Chinese commercial banks for the rest of this fiscal year. Of this $3.3 billion, Pakistan has already received a deposit of $700 million from the China Development Bank on 24 February 2023.” But warned that “while this year’s external payments needs may be met, the liquidity and external position next year will remain extremely fragile.”
As per Finance Ministry tweets 500 million dollars was received on 3 March from Industrial and Commercial Bank of China (ICBC) and another 500 million dollars on 17 March from ICBC with 300 million dollars expected any day now. The pledged outstanding amount from Chinese commercial banks is 1.4 billion dollars.
The government is also faced with soaring domestic borrowing costs (it remains the largest borrower from the domestic commercial banks and is rightly accused of crowding out private sector credit) due to a high policy rate that remains in the negative territory at 21 percent with a consumer price index (CPI) of 27.26 percent July-March however there has been a consistent rise in the CPI since November 2022 culminating in the March rate of 35.4 percent leading to fears that borrowing costs would rise even further.
The differential between the policy rate and inflation is at present 6.26 percent – a situation that would no doubt lead to the IMF pressurising the State Bank of Pakistan to raise the policy rate further. Contrast this with the policy rate in March 2022 of 9.75 percent with the then CPI of 12.7 percent – or a much smaller differential that obviated the need for the IMF to insist on a policy rate rise.
In February 2022 the month before the relief package that violated the IMF conditions was announced by the then Prime Minister Imran Khan the policy rate was 9.75 percent while inflation was 12.2 percent, a divergence again much less than in March 2023 indicative of more informed monetary policy decisions being taken last year compared to the present.
What does the future hold for us? Moody’s puts it succinctly: Pakistan’s external financing needs for fiscal 2024 are around $35-36 billion.
Pakistan has about $25-26 billion worth of external debt repayments (including interest payments) to make in fiscal 2024….In addition, Moody’s estimates Pakistan’s current account deficit at around $10 billion. Pakistan’s financing options beyond June 2023 are highly uncertain. It is not clear that another IMF programme is under discussion and if it does happen, how long the negotiations would take and what conditions would be attached to it. However, in the absence of an IMF programme, Pakistan is unlikely to unlock sufficient financing from multilateral and bilateral partners.”
Is restructuring debt an option for Pakistan? The IMF’s Managing Director on 20 February 2023 stated: “what we are asking for are steps Pakistan needs to take to be able to function as a country and not get into a dangerous place where its debt needs to be restructured.”
One would assume that Pakistan has reached that dangerous place guided by a finance minister who violated the agreement with the IMF in letter and spirit – a violation not targeted to provide relief to the poor but which envisaged the implementation of economically flawed decisions including controlling the rupee rate without adequate foreign exchange reserves to back it up and extending 110 billion rupee electricity subsidy to the well-off exporters while 33 million Pakistanis remained under the open skies after the floods.
One may differ from some of the Fund’s standard prescriptions particularly with respect to: (i) the current emphasis on raising revenue. A greater focus is required on the source of revenue as the Dar-led finance ministry continues to increase indirect taxes whose incidence on the poor is greater than on the rich, (ii) achieve full cost recovery not by passing on the buck on to the consumers but to contain inefficiencies even at the cost of different tariffs for different discos; (iii) slash current expenditure by calling for sacrifice by all the elite who are the major recipients, (iv) vigorously decentralize those ministries that were devolved under the eighteenth constitutional amendment; and finally (iv) to acknowledge that in this country inflation and the policy rate are not linked.
What is important today is to set up a team of negotiators who are qualified economists and hence able to understand the rationale behind the Fund’s prescriptions but who are also fully cognizant of the reasons behind the current state of Pakistan’s economy while suggesting the way forward through out of the box solutions that are economically viable.
Copyright Business Recorder, 2023
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