Foreign inflows

EDITORIAL: State news agency of Kingdom of Saudi Arabia (KSA) has reported that the KSA government could increase its investment in Pakistan’s economy to 10 billion dollars from the earlier announced one billion dollars and the ceiling in deposits to 5 billion dollars against the current 3 billion dollars.

This announcement came at the end of the week-long official visit of Chief of Army Staff, General Asim Munir to KSA and the United Arab Emirates (4-10 January), his first tour abroad after his appointment, strengthening the general belief that the economy is not only in extremely dire straits but that military support is a critical element in securing any assistance from friendly countries.

The Saudi news agency’s use of the word “could” rather than “would” is important because it supports the perception that inflows, pledged or otherwise, are unlikely until and unless the government and the International Monetary Fund (IMF) successfully conclude the ninth review, pending since 3 November 2022.

In this context, it was disturbing that while the Ministry of Finance tweeted that the Fund mission leader, Nathan Porter, and Martin Raiser, Deputy Director of the department administering the ongoing programme separately met Finance Minister Ishaq Dar yet it elicited no comment from either side.

The inexplicable strategy of the government in spite of frequent protestations that it is taking economic decisions that are compromising its electability in elections scheduled this year appears to be to proactively seek support, rollovers as well as additional funding, directly from friendly countries (China, KSA and the United Arab Emirates) even though all three countries directly pledged to the Fund that rollovers and additional funding to Pakistan till programme end (June 2023) will continue; and instead the government continues to defer the politically extremely challenging conditions agreed with the Fund in the seventh/eighth reviews dated September 2022 specifically in terms of raising the price of utilities and POL products that would up the rate of inflation to an untenable 35 to 40 percent (a rate that may well be above 55 to 60 percent in the event of a default) but also implement the time- bound agreed structural reforms, particularly in the appallingly performing power and tax sectors.

To make matters even more difficult to reach a successful ninth review with the Fund three post-October 2022 flawed decisions have yet to be reversed notably: (i) 110 billion rupee unfunded electricity subsidy to exporters (termed a regressive measure by the Director of the IMF department that deals with Pakistan); (ii) 1.8 trillion rupee agricultural package that envisages over 1.5 trillion rupee credit to farmers which, if past precedence is anything to go by, will further strengthen the elite capture of scarce resources as subsistence farmers have no collateral to secure a loan from a commercial bank (an objective at odds with the overwhelming need to support the 33 million flood victims); and (iii) the unfathomable policy from an economic perspective of sustained support for a widening gap between the interbank rate, the open market rate and the open market (black market) rate at which dollars are actually available.

It is fair to say that these three policy decisions contributed to Pakistan’s rating downgrade which in turn would have implications on pledged assistance from multilaterals/bilaterals as well as the rate of return on commercial loans and until and unless a measure of economic sense is allowed to prevail the situation would worsen to the extent that political unrest may add to the already unsustainable situation.

Pakistan’s way out is to first and foremost go back on the Fund programme which in turn would unlock pledges from not only friendly countries but also other multilaterals/bilaterals.

Second, the elite’s stranglehold on our scarce resources must be proactively loosened be it in terms of subsidies (including export rebates to sugar mills) or tax incentives/exemptions or cheaper credit.

The Fund’s seventh/eighth review documents warn that “delays on structural reforms, especially those related to the financial sector (resolving undercapitalised banks and winding down SBP’s involvement in the refinance schemes) could hamper financial sector stability and reduce the effectiveness of monetary policy.” Structural reforms that have been deferred from one IMF programme to the next (sadly the country continues this practice even in its current twenty-third programme) need to begin implementation – reforms designed to improve governance, be it through zero tolerance for corruption and basing promotions on performance evaluations rather than on nepotism, with the need for initiating pension reforms becoming more emergent with each passing year.

To create some leverage with the Fund that would allow for deferral of a few harsh conditions facing the general public the economic team needs to take economically informed decisions and begin implementation of reforms rather than steam-rolling policies of the past whose efficacy is not backed by empirical studies, but on outdated principles long abandoned in other countries.

Copyright Business Recorder, 2023