EDITORIAL: A Business Recorder exclusive revealed that Pakistan is seeking 21 billion dollar financial support from China — 10.735 billion dollar roll-over of existing loans, a pre-condition for the ongoing International Monetary Fund (IMF) programme loan stipulated and agreed during the staff-level agreement on 12 May 2019 prior to the loan approval by the Board of Directors, and an additional 10 billion dollar deposit fund.
This indicates three extremely disturbing elements that remain unaddressed by the third finance minister during more than three and a half years of the Khan administration. First, China unlike several Western countries has no history of extending grants and is reticent in publicly revealing the amount and terms of its loans, like Saudi Arabia, though some members of the Khan administration have made this information public. It is important to note that David Malpas the World Bank President recently revealed that out of the 35 billion dollars that the world’s 74 lowest income countries owe in debt service payments this year about 37 percent or 13.1 billion dollars is owed to Chinese entities with a similar amount owed to the private sector.
In this instance, it is relevant to note that several Chinese companies operating under the umbrella of the China Pakistan Economic Corridor (CPEC), particularly in the power sector, have made it known to relevant government entities that their contractual obligations are not being met and have urged the government to clear its bills.
This has to be dealt with before one would expect China to park any more funds in the SBP. In addition, one would hope that the 10 billion dollar deposit fund being sought from China is on easier terms than the 3 billion dollars parked by Saudi Arabia in the State Bank of Pakistan for one year — a reliance that reflects more traditional sources of multilateral and bilateral financing drying up (or available at exorbitant interest with a short amortization period) due to external factors inclusive of changing geopolitical considerations bolstered by domestic policy decisions (for example, the third amnesty scheme in less than four years) and public statements (Prime Minister’s comments during the Mailsi public meeting).
Second, while the government claims that it has increased its reliance on foreign borrowing to pay off past loans yet it has also acknowledged that around 10 billion dollars borrowed during the past three years was used to fund the budget and disturbingly to fund current expenditure which rose from 4.3 trillion rupees in the revised estimates of 2017-18 to over 7.5 trillion rupees budgeted in the current year. This is likely to be around 8 trillion rupees by fiscal year end on 30 June 2022 given that the estimated cost of the relief package announced by the Prime Minister on 28 February was understated at around 300 billion rupees in additional subsidies as the international price of oil per barrel cost continues to rise — from 103 dollars on the day the Prime Minister announced the relief package to over 120 dollars today.
And finally, poorly performing macroeconomic indicators that are the outcome of flawed policy decisions that include strengthening foreign exchange reserves through heavier than ever reliance on borrowing (including equity as well as swap arrangements), and dealing with inflation not through contractionary policies but expansionary policies with a massive rise in subsidies to the poor and the vulnerable and widening the budget deficit to around 8 percent from the budgeted high of 6.9 percent, an inflationary policy.
In addition, the government envisages injecting large amounts of credit to the disadvantaged in different sectors, including housing loans that raises the money supply in circulation, another highly inflationary policy, while it is unclear how many of the loans would have to be written off by the government as non-performing loans. These measures claimed to be targeted to reduce inflation defy basic economic logic.
The Prime Minister and Finance Minister insist that the economy is on the right path, citing foreign media reports as proof positive like their predecessors, while ignoring all signs of poorly performing macroeconomic indicators that include an eroding rupee, attributed to the widening trade gap with the exchange rate being used as a shock absorber to curtail imports, the rising budget deficit as noted above, and reliance on borrowing — domestic and external — reaching historical highs.
Copyright Business Recorder, 2022
Comments
Comments are closed.