Default imminent?

The mantra “Pakistan is heading for a default” and the counter narrative “that it is not going to default” are reverberating for the last eight months in the corridors of national politics and print and electronic media of the country. This mantra has done much damage to the country’s economy and its fiscal credentials. Investor sentiment is at its lowest ebb. Foreign direct investment (FDI), which has been struggling since long, has now totally dried out. The local investor too is sitting on the fence and rupee has failed to strengthen. Money transactions in the market are bare at their minimum. The government inflows are declining.

A red flag of likely default was first raised by Miftah Ismail after assuming the office of the Finance Minister some eight months back. Upon signing of the staff-level agreement with IMF the minister changed his narrative to “danger of default has been averted for good as the government took some hard decisions by increasing electricity tariffs and petrol prices.” But things did not stop on that.

Former finance minister Shaukat Tarin this week added his bit to the issue of default. He said that the government should stop blaming the Pakistan Tehreek-e-Insaf (PTI), and if the government shows a balance of inflows and outflows the situation will become clear and the speculation of default in the markets will die down. He remarked that PTI does not want Pakistan to default and God-willing, it will not default. The tax revenues are decreasing due to which the fiscal deficit has increased.

Tarin said that in the first quarter of the ongoing financial year, the fiscal deficit was estimated at Rs400 billion, which has now increased to Rs810 billion. The government managers themselves are admitting that the GDP growth may be zero percent, he said. The former finance minister raised many red flags, foremost being that against expectations of the dollar stabilising below 200 the interbank rate is Rs224 and the open market rate is Rs230, but in the open market it is available at Rs240. Moreover, he added, the government took a loan of Rs6.5 billion in six months and made a loss of Rs 3,000 billion in six months. According to him, the Letters of Credit (LCs) face difficulties as negotiation of LCs worth billions of dollars are withheld. “It is for the first time that the economy has not stabilised after the IMF programme,” the foreign finance minister pointed out.

Expert opinion may vary from one person to another. But there are some chilling realities on ground which cannot be denied or ignored. It was widely expected that upon Pakistan’s removal from the FATF grey list, and reaching the IMF agreement earlier investor sentiment for Pakistan would revive and strengthen the Rupee against the US dollar and spur economic activity, thereby increasing inflows for the government and narrowing the gap between inflows and outflows and gradually push back the threat of default, allowing the fiscal status of the government to stabilise and the threat of default averted for good. None of this has happened.

With this sluggish mood of the market, with no sign of a turn- around, the government inflows are likely to maintain the decline trend - inching the nation more towards the red.

The other matter of great concern is the uncertainty about when the International Monetary Fund’s (IMF’s) review will take place. Inflows from the IMF are most critical at this juncture. Be that as it may, default or no default, one thing is certain that Pakistan’s current fiscal situation is most critical and not sustainable for long.

Copyright Business Recorder, 2022