Finance minister Ishaq Dar has been regularly claiming two things: One, Pakistan won’t default on its external debt commitments and two, that the real value of the PKR/USD is below 250.
Without delving into his twisted arguments and changing goalposts, there are merits in both statements, and if the external debt handling is carefully crafted out, the country can come out of this growing mess. This implies that our economic problems are being overstated and overly priced.
Something similar is echoed by Professor Atif Main in a recent podcast where at the end of gham (sad) hour discussion, he presented a ray of hope by saying that Pakistan’s problems are small in the grand scheme of things. What required is to add a $10 per capita rise in exports to steer out of the perpetuating crisis.
He gave an analogy that if every Pakistani sold a combo of burger and fries (I would rather say bun kabab and biryani), per year, Pakistan can balance the external account.
He further added that it’s simultaneously good and bad news. The good news is that our problems are tiny. The bad news is that we have behaved badly in the past few decades to push to the state of disarray we are in.
And what he did not say (but I think he would agree with) is that having Ishaq Dar as a finance minister for the third time in as many decades is a demonstration of how bad we are handling the economic issues.
The point is that both Dar and Atif Mian are right. But Dar needs to realize that he is (part of) the problem, not the solution. One can read between the lines that our lenders (especially the lender of last resort) do not trust our finance minister.
And bringing the IMF back is extremely difficult till he is at the helm of affairs. Those who are in the control room should take note here.
Anyhow, Dar recently in media interactions hinted about possible debt reprofiling or restructuring – there are subtle but significant differences in terms of implications between the two. And he further added that there is no need for multilateral debt restructuring (mainly the World Bank).
The idea is to mainly reprofile the bilateral debt. And he further added that we don’t need domestic debt restructuring.
I largely agree with these points. But these are to be dealt with great care and to be done by that government which has public mandate or being run by the controllers themselves without even showing on surface that they are democratic.
Both models can work; but not this compromised solution where we have a democratic government that has axed a political party which has over 50 percent of public support.
That is simply a recipe for disaster – making small problems big, as Pakistan’s economic problems perhaps are small in global scheme of things; but not the social problems, as it is the fifth largest country in the world in terms of population (third biggest in terms of poverty) where people have arms and military has nuclear arsenal.
And the pot is boiling –the authorities are at loggerheads with (by far) the most populous leader in a country where the economy is facing stagflation.
The debt reprofiling (or restructuring) is a sensitive issue and that must be dealt with a lot of care. Otherwise, it could be disastrous. Political clarity and stability are warranted to do so.
One can sense that there are some people in the current government who are using the ‘IMF card’ as a ‘negotiating tool’ for their political bargain, as public popularity is not on their side. That is a dangerous ploy. We must get out of these dangerous negotiations which are in play for months.
On debt reprofiling details, the total external public debt is $96 billion – out of it $7.5 billion of IMF which cannot be rescheduled. The biggest lending group is multilateral (mainly WB) at $37 billion, and that can be handled once the country is in the IMF programme, as one arm of multilateral to lend to repay the other, given the country is in the IMF programme.
The market base debt (Euro bond & Sukuk) is $7.8 billion. Here the price is in the secondary market is very high and it’s hard to get any further debt without attaining stability. And for that IMF is a must.
The bilateral debt (from other sovereign countries) is $26.5 – out of $8.8 billion in the Paris Club countries where Dar is saying that there is no need of negotiation. Thus, what is required is to deal with around $18 billion bilateral direct loan and $6 billion of indirect bilateral loans (dole out to PSEs).
Majority of that $24 billion is from China. And the remaining $11 billion are foreign exchange liabilities (including $4.5 billion swaps on private people deposits in foreign currency in Pakistan banks).
Within these bilateral debt and foreign exchange liabilities, the negotiations of reprofiling are with China and the Middle Eastern countries. In terms of repayment, around $10 billion is short term to be paid in FY24 and assumed to re-roll every year (already these are being rerolled this year). This $10 billion needs to be converted into the long term. And in addition, another $5-10 billion in long-term loans (or investment) is required to deal with $20 billion public debt repayment next year.
And once that is to be dealt with, the repayment to be reduced by $10 billion each in the subsequent two years, and the repayment to reduce to a level to end the panic. Then with softening global commodity prices, the country can steer out of the crisis.
Once that is done, there would be no need of domestic debt restructuring where the problem is not profiling (as 68 percent of domestic debt is long term), but its high cost of debt servicing. That can be dealt with by lowering the interest rates or taxing higher on interest income on these debts.
Then 35 percent of domestic debt is being owned by SBP (directly or indirectly through open market operations) where the government is the residual benefactor. Plus, the domestic debt is inflating out, as real interest rates are negative.
These details are a little technical and to be covered in a subsequent article; but the point here is to emphasize that the domestic debt can be (and should be) handled without restructuring.
And in case the external debt is being mishandled, the domestic debt could be forced to restructure which could have serious repercussions on the domestic banking system and could lead to hyperinflation and massive default in private sector (to be explained later).
That is why having IMF on board and a sincere government (not using IMF as a tool of political negotiation) is imperative. And in addition, the need is $15-20 billion from friends and the world to take us out of this crisis. But no one to help unless we put our fiscal house in order – there are no signs of doing so in the current budget.
The buzz is that the controllers are thinking on those lines, and that is evident by the fact that Minster of State for Finance and Revenue (Aisha Pasha) is working on ‘Charter of Economy’ independent of Dar. But that might not be the mandate of the current government. Let’s see how the political things pan out- but we have two options –continue with the business as usual and fall into the rabbit hole or have state writ in letter and spirit to instill economic reforms.
Copyright Business Recorder, 2023
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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