EDITORIAL: Federal Finance Minister Ishaq Dar gave an impassioned virtual address to mark the first listing of the Developmental Real Estate Trust on the Pakistan Stock Exchange by categorically stating that the country will not default and will complete the ongoing International Monetary Fund programme, dismissing the doomsayers as pseudo-intellectuals.
However, the market response to his words was far from favourable and the stock market nose-dived by 523.48 points by the end of the day while the rupee plunged by Re0.22 paisa (0.1 percent) in the interbank market and by Re0.55 paisa in the open market though dollar remains unavailable at the bid rate of 233.25 in the open market.
The question as to why the market did not respond favourably to the finance minister’s assurance is because he did not deal with and more importantly spell his strategy to address the concerns of the market, which include the widening differential between interbank and open market rate, raising unfunded subsidies by at least 100 billion rupees, resisting attempts to achieve full cost recovery through improved governance that would result in passing it on to the hapless consumers as in the past, and last but not least may also lead to passing the revenue shortfall (due to import contraction through administrative and exchange measures) on to the consumers through raising regressive indirect taxes instead of reducing expenditure – measures that are hardly conducive to winning the elections.
Instead, Dar reiterated a defence that no longer finds any traction on five counts – be it from an economic standpoint or from that of the general public. First, Pakistan’s foreign exchange reserves are less than a maximum of five weeks of essential imports and with a reported one billion dollar payment due next week reserves are likely to plummet to around 5 billion dollars which must be a source of considerable anxiety.
Import contraction measures have been eased for some key sectors; however, they do rightly remain in place for others as a mitigating measure to forestall the real possibility of an untenable balance of payment problem resurfacing.
Thus, while technically external debt payments will be possible yet import restrictions are not an indication of healthy reserves.
Dar reminisced about the reserves during his previous tenure; however, he needs reminding that the bulk of those reserves were also borrowed (debt equity) based on a flawed policy to borrow externally as the rate was lower abroad at around 6 to 7 percent than in the country at 12 percent – a policy that partly accounts for the current debt repayment bill.
Second, Dar placed the onus of a high of 16 percent discount rate on the autonomy of the State Bank of Pakistan. Even if one accepts the veracity of this claim, and there are many who dispute it, it is inaccurate on two counts: (i) while borrowing costs have risen due to the policy rate yet without exchange flexibility reflected by the widening differential between the interbank and open market rates remittances would have been higher and eased the pressure on the depleting foreign exchange reserves.
Thirdly, Dar has not only been dragging his feet in implementing the IMF conditions which account for a delay of two months to-date in the ninth review, as scheduled in the seventh/eighth review, but has been announcing policy measures that are at odds with the thrust of the Fund programme and that too is one reason why the market has not responded favourably to his remarks.
Fourthly, he claimed that Pakistan’s debt to GDP ratio was 72 percent while that of USA’s was 110 percent, Japan’s 227 percent and the UK’s 101 percent. What he failed to note was that all these countries, barring Pakistan, are able to pay interest on their debt in their own currencies without seeking refinancing and are therefore considered stable.
Pakistan is struggling to pay off external debts with creditors seeking ever higher interest rates, a state of affairs reflected by the recent downgrade by a noted global rating agencies. Additionally Dar would do well to recall that during his previous stint as finance minister when rates were low in the West, Pakistan issued Eurobonds at well over the market rate while a heavily indebted Greece, as a member of the European Union, was offered loans at much lower rates.
And finally, the finance minister blamed smuggling of dollars, wheat and fertilizer to Afghanistan as a major reason for the worsening economic situation in the country, adding that he has directed law enforcement agencies to deal with it.
While not denying that smuggling to Afghanistan is a factor that has exacerbated the problem yet it is certainly not the sole or indeed the main factor in the current impasse. Not appreciating the situation in the real sense of the word or trying to pass the buck is no excuse, so to speak.
Copyright Business Recorder, 2022
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