Gross financing, and medium-term economic strategy

International Monetary Fund (IMF) Country Report No. 22/288, released in September 2022 – the last such report released, since there have been no successful programme reviews completed since then, given that report was released after completion of seventh and eighth reviews of the ongoing Extended Fund Facility (EFF) programme with IMF – indicated the gross financing requirements of the Pakistan up till 2026-27, whereby the country needs around $36.6 billion for 2023-24, $35.7 billion for 2024-25, $38.5 billion for 2025-26, and $39.3 billion for 2026-27.

‘Table 3b’ of the same report, regarding these financing requirements, also indicates that the country is likely to be running current account deficit at around $10billion, $10.6 billion, $11.5 billion, and $12.6 billion, for the same four years, respectively.

Reportedly, the government recently indicated that it would curtail these deficits to even surpluses, but even assuming there will be no deficits for these years, the gross financing needs will still be $26.6 billion, $25.1 billion, $27 billion, and $26.7 billion, respectively, for the same four years.

Here, it needs to emphasized that drastically reducing imports for many months now in an effort to basically fend off otherwise serious external debt default risks that the country faces, and also to decrease pressure on domestic currency, which even then has seen serious depreciation during the last many months has had a major impact on both domestic production, and exports, given there is a high proportion of imported raw materials in industrial production.

A serious loss of output on one hand – with economic growth falling from around 6 percent last fiscal year to less than one percent, and expected to be around 0.3 percent for the current fiscal year – and a rise in inflation on the other – from around 12 percent CPI in last April to increasing four times to roughly 36 percent in this April –given high level of imported inflation, and cost-push inflation, and lack of investment for improving aggregate supply-side, basically at the back of rupee depreciation, and overall falling exports, therefore, require taking the lid off from required imports for positively impacting domestic production, exports earnings, and reducing inflation, and hence, it may not be desirable to run even a balanced current account deficit over the medium term.

In any case, this situation will even weaken to build capacity to repay debt liabilities, even if it is rescheduled/re-profiled, not to mention the long-term negative impact of a country that is facing serious food shortage concerns, and needs to make deep climate-, and public health sector-related investments to deal with the existential threats of climate change and the Pandemicene phenomenon, and also to quickly recover the serious loss of output in the wake of practicing sharp monetary-, and fiscal austerity policies for many months now.

For instance, highlighting the dire food scarcity concerns facing Pakistan, a recent ‘FSIN and Global Network Against Food Crises’ published report ‘Global Report on Food Crises (GRFC) 2023’ pointed out: ‘Pakistan has been defined as a ‘major’ food crisis since 2017 when over 50 percent of its analysed population was in IPC [Integrated Food Security Phase Classification] Phase 3 or above. …Even before Pakistan was hit by the devastating monsoon floods in mid-June and the end of August, heatwaves in March and April, in conjunction with fertilizer shortages and lack of irrigation water, had affected ‘Rabi’ wheat crop yields and lowered livestock production in most of the analysed districts.’

Wheat shortages at the back of climate-related disaster last year, along with the ongoing war in Ukraine, have already increased import requirements facing the country on one hand and, on the other, depreciating currency – the same report pointed out that during December 2022 to February 2023 rupee depreciated 54 percent against the US$, and with only nine countries globally with more depreciation during that time– and the overall global supply shortages increasing prices have overall increased the imported inflation component of overall inflation facing the country; for instance, sensitive price index (SPI) with major component in it of food, has seen drastic increase over many months now, and for April (year-on-year) stood at around 42 percent. Hence, greater importing requirements will make it difficult to curtail current account deficit, and will likely add to gross financing needs.

The same IMF report, in ‘Table 3a’ indicates that exports will see an upward trajectory up till 2026-27; the upper time limit of the report. But serious austerity policies since many months now have resulted in low level of exports for the current fiscal year, whereby unlike projected in the report for 2022-23 at $35.9 billion, exports for July-April 2022-23 stood at $23.2 billion, and if monthly average at $2.3 is added for the next two months it will be still be at $27.8 billion, and short by $8.1 billion of the projected exports at $35.9 billion for 2022-23 by the IMF.

So even if a new IMF programme is negotiated, which has the same pro-cyclical, austerity basis, and for the purpose of rough indicative analysis for policy feedback, if the same $8.1 billion shortfall is assumed to follow in exports for the next four fiscal years up till 2026-27, the gross financing requirements facing the government – given all else constant – will be at $34.7 billion for 2023-24, $33.2 billion for 2024-25, $35.1 billion for 2025-26, and $34.8 for 2026-27.

At the same time, ‘Table 3a’ of the same IMF report points out foreign portfolio investment (FPI) projected at $6.2 billion for 2023-24, $7.1 billion for 2024-25, $6.8billion for 2025-26, and $8.6 billion for 2026-27.

Hence, following a monetary and fiscal austerity policy will on one hand likely reduce export earnings, as indicated above, given the trend for the current fiscal year, and on the other, pursuing it for the sake of attracting an otherwise highly volatile FPI will also only be rough that much as the loss in an otherwise more dependable and more economically consequential foreign direct investment (FDI) in terms of employment enhancement, and serving as a basis for attracting foreign direct investment, and overall boosting the debt repayment capacity in a much more sustainable way than FPI.

Having said that, even the projected FDI numbers for the same four years in ‘Table 3a’ – $2.8 billion (2023-24), $4.6 billion (2024-25), $4.6 (2025-26), and $4.8 billion (2026-27)– look a seriously uphill task, given the overall austerity-based current and expected future IMF programme – since IMF policy thinking seems strongly rooted in the overall neoliberal school of thought, even though there has been a strong global backlash against neoliberal, austerity, pro-cyclical policies especially since the Global Financial Crisis 2007-08, and also in the wake of austerity policies since the start of the pandemic – and apparently dominant policy thinking domestically.

Hence, planning a medium-term strategy to avoid a possible default, and to also come out of the current deep stagflationary economic situation, weakening capacity to repay in the first place, in addition to causing deep economic misery, presents to government the choice of either looking for negotiating another austerity-based IMF programme in an effort to unlock greater financial flows – although they can also be pushed through by routine positive IMF Article IV assessments, indicating to development partners and private creditors the economic health of the country – and obtain debt restructuring/re-profiling facilitation through an IMF programme umbrella, or to independently negotiate such restructuring at the back of bringing in deep non-neoliberal economic institutional, organizational, and market reforms, directly restructuring with China, and private creditors, and avoid the otherwise serious retarding consequences of austerity policies on economic growth, exports, FDI, and likely increase in domestic and external debt interest repayments (at the back of policy rate increases, seen under monetary austerity policy, as main tool to curb an otherwise significant supply-side inflationary phenomenon), diminishing the capacity to avoid default as well, in addition to economic misery.

In parallel, a mission-oriented, much more meaningful economic diplomacy is employed to bring in greater allocation of IMF special drawing rights (SDRs) and climate-related SDRs allocation as suggested under the ‘Bridgetown Initiative’. There is also the need for pursuing more climate finance from otherwise pledge made by rich, advanced countries at $100 billion annually for developing countries.

Here, it needs to be indicated that according to ‘Table 3b’, around $2.8 billion worth of SDRs were received during 2021-22 as enhanced allocation during the pandemic, but nothing has been projected to be received thereafter up till 2026-27, although there have been serious efforts in the ‘Bridgetown Initiative’ and otherwise, seeking more enhanced SDR allocations, and with better allocation formula (one based on needs, and not based on country quotas). So, better economic diplomacy effort can bring greater finances for the country.

Moreover, it also needs to be understood that following an austerity policy slows likely slows down project-, and programme financing, in the project/programmes where government also has to make investment, which it finds difficult to make under such fiscal austerity conditionalities as bringing in primary surplus, and in higher domestic interest payments under monetary austerity inclined IMF programme conditionalities.

So, any medium-term financing strategy should also weigh in the downside risk of austerity policies on project/programme financing, especially when a lot of climate-related financing has been pledged after the catastrophic floods of last year.

Copyright Business Recorder, 2023