‘Q-Block’ needs to reinvent itself?

Pakistan’s economy has entered the stabilisation phase after going through an extremely turbulent period. However, it is too early to think about reviving economic growth and generating employment, as the focus should be on restoring permanency to the stabilization efforts.

The key is to diversify sources of external financing, which lately has been confined merely to multilateral and bilateral options.

Sovereignty of the country has been compromised, as in the last two years or so, virtually at every engagement on the international forums Pakistan authorities have effectively behaved like beggars, and they could not be choosers in sovereign decision making.

It is about time to rethink the strategy, and work on reviving the other external debt financing options, which the finance minister is already thinking about it. However, before exploring any commercial and market options, the key is to enter a fresh Extended Finance Facility (EFF) with the IMF (International Monetary Fund). The finance minister would initiate the talks in the upcoming Spring meetings and will try to get the macroeconomic framework ready before the federal budget so that the budgetary process can remain insulated from political patronage.

Once the EFF is in place, the finance minister’s plan, it appears, is to reestablish the financial ties with the UAE-based commercial banks who used to provide $2-2.5 billion before the external financing crisis had hit the roof. The plan is to get a similar amount.

The second in line should be access to the global debt capital markets where the outstanding stock in Eurobond and Sukuk market is $7.8 billion out of around $100 billion total external public debt. And one billion is going to be paid back in a few weeks.However, the finance ministry may be of the view that reaching out to the global capital markets may not yield optimal results till the credit ratings of the country have improved, and perhaps the process may take another fiscal year.

In the meanwhile, finance minister is keen on launching the Panda Bond. He is of the view that Pakistan has been successful in generating G-to-G and commercial banks financing from China in the last few years, and it is about time to reach the Chinese capital markets. The plan is to secure an inaugural issue this calendar year.

These diversifications are necessary, and the finance minister should think about attracting foreign portfolio investment in T-Bills (also known as hot money). For that to happen, clarity on the proposal of domestic debt restructuring is imperative. And the finance minister is of the view that there is no need, and any domestic debt restructuring can create a mess, which would take a decade to unwind.

It’s a high cost that the economy would pay. The risk-free assets would no longer remain risk free, and that can result in dollarization of the economy, and the lost confidence may take a very long time to revive. For example, in 1998, when FE25 deposits were frozen, the toll was $11 billion (12 % of GDP) and the confidence could never be restored, as today the toll is mere $6.3 billion (2% of GDP).

Domestic debt restructuring can potentially trigger a banking crisis which if not dealt with carefully can drag the whole economy down. Thus, it is best to avoid it, and can solve the problem of higher fiscal cost of domestic debt repayment by further enhancing the income tax on banks to around 60 percent. And similarly, the tax returns on individual and firms’ investment in government papers, and tax on depositors return on saving accounts can be enhanced to effectively lower the yields. And the tax on foreign portfolio investment can be kept low to attract funds, which would help diversify the external financing.

This investment would take a bet on currency and interest rates. It appears that the currency is likely to remain stable, although the IMF has apprehensions on the ease of import payments – especially on contractual and dividend payments. However, the volumes in interbank are thin while the imported demand has been significantly dented.

Thus, currency stability is likely to continue. However, interest rates may come down at a snail’s pace. Keeping real rates high on forward looking basis is important to keep the demand low, which is imperative for keeping the current account in check.

In a nutshell, once the next EFF is in place, avenues of diversification of financing public debt must be widened, which will reduce the balance of payment risk, which is a prerequisite for private investment to pour in, and once private investment (from local seth and foreigners) come in, the government can think of much need growth and employment generation.

Copyright Business Recorder, 2024