Breakdown of external economic relations

The fact that Pakistan is currently operating under an IMF (International Monetary Fund) programme, under the Extended Fund Facility (EFF), should have been a source of comfort to external sources of foreign exchange to Pakistan either in the form of remittances, by purchase of Euro/Sukuk bonds, extension of commercial bank loans or with foreign direct investment. Unfortunately, however, this has not been the case in recent weeks.

Why is this the case? First, given the precarious low level of foreign exchange reserves of $8 billion and with the annual external payment obligations almost four times these reserves, international credit-rating agencies have chosen to downgrade Pakistan’s rating to near default level, despite the presence of an IMF programme. Pakistan is now in the group of countries like Argentina, Ethiopia, Nigeria, Ghana, etc.

Second, in recent months, the SBP has severely restricted the repatriation of profits of multinational companies. During the first quarter of 2022-23, the amount repatriated is only $58 million as compared to $477 million in the corresponding quarter of 2021-22. This has sent a very negative signal to potential foreign investors.

Third, the perception of low creditworthiness of Pakistan has led to a very big credit default swap of over 75% on Pakistani international bonds. Consequently, the cost of flotation of Euro/Sukuk Bonds has become excessively high. The annual target of new bonds of almost $3 billion in 2022-23 is unlikely to be met.

Fourth, remittances have also taken a big plunge recently. They have fallen by over 17% in October. Earlier, they had declined by 6% in the first quarter. This may be partly due to recession in the USA and EU countries. However, the big reason is the widening of the gap in the exchange rate between the open market rate and the inter-bank rate to above Rs 10 per US$. This has led to a diversion of remittances from official banking channels to hawala transactions.

Fifth, multilateral and bilateral agencies were unwilling earlier to extend loan facilities to Pakistan in the absence of a functional IMF programme. This has happened with the seventh and eighth review completion. The programme has been extended to June 2023 with three more quarterly reviews. The Fund released a loan installment of $1.2 billion to Pakistan on the 1st of September. Prior to this in July and August the inflows had been marginal from multilateral agencies. However, it has not improved substantially after the 1st of September.

The overall magnitude of external inflows into Pakistan in the first quarter of 2022-23 is presented in Table 1. The numbers present a depressing picture, as follows:

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                             Table 1
                    External Inflows into Pakistan
                           July - September
                                                         ($ Million)
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                                2021-22      2022-23     Growth Rate
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Secondary Income                  8,526        7,811            -8.4
Workers' Remittances              8,199        7,685            -6.3
Other Current Transfers             327          126           -61.5
Foreign Investment                1,365          128           -90.6
Foreign Direct Investment           418          157           -62.4
Foreign Portfolio Investment        947          -29          -102.8
Government Assistance (Net)       1,637          197           -88.0
Disbursements                     2,456        2,058           -16.2
Amortization                        819        1,861           127.2
====================================================================
TOTAL                            11,528        8,136           -29.4
====================================================================
Source: SBP
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There has been a fall in secondary income of over 8%. Remittances have declined by 6% while other current transfers are down by over 61%. Foreign investment, direct and portfolio, has virtually ceased with a precipitate fall of over 90%. Assistance to the government in the form of loans has also been reduced. Disbursements are down by 16% while the level of amortization has more than doubled.

Overall, the total inflow in the first quarter was of $8136 million, inclusive of remittances. This is $3392 million lower than the inflow in the first quarter of 2021-22, implying a big fall of almost 30%.

The IMF programme includes an external financing plan for 2022-23 to ensure that not only does Pakistan meet its external payment obligations but is able to increase its foreign exchange reserves by almost $7 billion to a safe level by the end of 2022-23. The estimated total required inflow accordingly is $52.5 billion. This includes inflows of $30 billion in the form of remittances and $22.5 billion of other inflows. On the average, the quarterly inflow in 2022-23 should be $13.1 billion.

The actual inflow was $8.1 billion, as shown in Table 1. This represents a big shortfall of $5 billion. It is not surprising that the foreign exchange reserves of the SBP (State Bank of Pakistan), instead of increasing, declined by $2 billion in the first quarter of 2022-23.

The disappointment is that there has been inadequate support to Pakistan even in the presence of an IMF programme and in the face of emergency requirements after the devastation caused by the floods.

Fortunately, the two major bilaterals, Saudi Arabia and China, have promised combined support of over $13 billion. However, this is largely in the form of debt rollover and deferred payment for oil. It is not clear how much new money will flow from these two sources in 2022-23.

The Asian Development Bank has also recently sent $1.5 billion to Pakistan largely for support to flood rehabilitation and reconstruction. However, it is not clear how much of this is a transfer of funds from other project loans committed to Pakistan. Also, the arrival of these funds was followed by lumpy debt repayments. Consequently, the impact on increasing foreign exchange reserves was limited.

More recently, the relationship with the IMF has also run into difficulties and the process of ninth review has been delayed. Apparently, the IMF wants a precise estimation of the impact on the consolidated budgetary position of the federal and provincial governments of the flood relief and rehabilitation operations. Also, prior actions like the passage of the law on SOEs (state-owned enterprises), hike in the power tariff and the targeted enhancement in the petroleum levy have not been implemented.

The growing reticence of the bilaterals has also become visible. China has made a big gesture of support as highlighted above, but it has also focused on security issues in projects and made the financial support conditional on continuation of the IMF programme.

Also, the Finance Minister has made a visit to Dubai to motivate international commercial banks to lend to Pakistan. No information has been disseminated of the extent of the success achieved.

Pakistan today is in one of its most difficult times. Reserves are low, new external inflows have become very limited, floods have increased the need for more external support and the political situation is characterised by a quagmire. Relations must be improved with potential lenders in a proactive manner by taking the appropriate steps. We hope and pray that our country will somehow emerge once again from the multidimensional crisis that it currently faces.

Copyright Business Recorder, 2022