ARTICLE: The handful of decision makers in the Ministry of Finance maintain that Pakistan cannot possibly meet its debt obligations without the International Monetary Fund's (IMF's) 6 billion dollar thirtynine-month Extended Fund Facility (EFF) programme, while critics argue that its political cost is too high and debt obligations can be better met by massive curtailment of government expenditure, imposing non-tariff barriers on unnecessary imports and implementing across the board reforms particularly in the poorly performing power sector and the Federal Board of Revenue - reforms that have been identified in the EFF and were components of previous multilateral/bilateral programme and project assistance.
Being on an IMF programme provides a comfort level to other multilaterals and bilaterals that the country will remain engaged in implementing the agreed meaningful reform agenda which the Fund monitors through mandatory quarterly reviews.
In 2019-20 external loans were budgeted at 2.99 trillion rupees and 2.18 trillion rupees were realized however three components need consideration. First programme loans rose from the budgeted 276.9 billion rupees to 620.2 billion rupees in the revised estimates of 2019-20 no doubt as a consequence of being on the IMF programme. In the current year 503 billion rupees is budgeted under this head which is unlikely to be realized if the EFF is not resumed. To put this amount in perspective the government spends more than double 503 billion rupees to meet losses of poorly performing state owned entities (SOEs); and if the Auditor General's report is anything to go by then loss through irregularities, mismanagement and corruption is in excess of this amount. A better option would be to reduce these components of government expenditure.
The jury is out on whether support from friendly countries procured in October 2018, before the EFF staff level agreement was reached on 12 May 2019, would be withdrawn and not rolled-over as pledged to the Fund, if Pakistan is no longer on an IMF programme because factors other than Pakistan adhering to time bound structural adjustment and quantitative benchmarks agreed with the Fund maybe at play.
Second, project loans were budgeted last year at 211 billion rupees while revised estimates gave the slightly higher figure of 214 billion rupees. Project loans are generally not held hostage to being on an IMF programme by multilaterals and bilaterals.
Third, there was a marked decline from the budgeted amount of 2.5 trillion rupees under 'other aid' to 1.346 trillion rupees in the revised estimates (with the exception being assistance from IMF) and included (i) budgeted Saudi oil facility of 480 billion rupees (around 2.8 billion dollars at a 167 rupee dollar parity) with only 138.8 billion rupees (0.8 billion dollars) realized. In 2018 the Saudi oil facility was announced by Pakistani authorities to be 3.2 billion dollars in any given year to be extended for three years. The Saudi silence on the matter was seen as the kingdom's normal practice as, like China, Saudi Arabia is highly reticent about announcing its assistance. A report, not confirmed officially or in synch with statements of cabinet members who had revealed the extent of Saudi assistance in 2018, indicates that the facility expired a couple of months ago and the government of Pakistan is now formally seeking its renewal. In addition, the Saudis reportedly were reimbursed one billion dollars out of the 3 billion dollar loan disbursed in 2018 and which the Saudi government pledged would be rolled over for the duration of the IMF programme which would now end sometime in 2023 - a delay attributed to the pandemic. However, the IMF programme would remain unaffected because reportedly China has disbursed the shortfall though the matter of the oil facility is unclear.
In 'other aid' the government budgeted 750 billion rupees from friendly countries last year (around 5 billion dollars), noted zero inflows in the revised estimates and projected zero under this head in the current year. It is unclear whether this amount was budgeted based on what had already been received in 2018 and pledged by the friendly countries to be rolled-over till the end of the IMF programme or whether additional loans were required to meet the shortfall. Another major shortfall was in issuing debt equity - the 480 billion rupees budgeted from Eurobonds/Sukuk was not realized last year. The government's intent this year is to issue 247.5 billion rupees of Eurobonds/sukuk, if not more depending on the country's requirements and the market response, and this may be the reason behind the government's decision not to request a delay in payment of interest and loan from foreign commercial banks as and when due (on offer by the creditors as a consequence of the pandemic) because otherwise the country's rating would have declined and with it the capacity and the cost of engaging in debt equity.
Nonetheless, the budget for the current year envisages a reduction of 1.3 trillion rupees due to zero outlay on foreign loans repayment (accounting for 1.24 trillion rupees in the revised estimates for last year) due to the official debt deferment till 31 December 2020. There is ongoing discussion amongst donor countries that relief on debt/debt service payments to developing countries maybe extended from 31 December 2020 to 31 December 2021. However, this is a deferment not debt relief which would imply that in fiscal year 2022-23 liquidity issues facing the treasury may rise significantly unless the necessary reforms are implemented.
Governance reforms are therefore critical if the country is to move towards reducing its reliance on debt - domestic and foreign. Power sector and tax reforms were identified decades ago by multilaterals as well as domestic experts as critical for not only the health of these sectors but for the entire economy however administration after administration including the incumbent has taken the easy way out - raised tariffs which have contributed to the erosion of the quality of life as well as making our exports uncompetitive and raising existing taxes rather than widening the tax net thereby further burdening the economically active sectors/individuals.
To conclude, it is hoped that the government focuses on reforms spearheaded by tax and power sector reforms as well as resolve issues besetting SOEs. The amount saved from these measures would be more than a trillion and a half rupees. And while the government may require the second IMF tranche under the EFF to shore up reserves (required for essential imports as well as interest and repayment of external unofficial loans) yet after achieving a massive decline in current account deficit it is time to focus on implementing a monetary policy that encourages productivity and contain unnecessary imports through non-tariff barriers till the country finally surfaces from its ongoing economic impasse.
Copyright Business Recorder, 2020
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