EDITORIAL: The 29 June 2023 staff-level agreement (SLA) on the 3 billion dollar nine-month Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) began to pay economic dividends a few hours after it was reached: the bond returns were raised from 36 to the dollar to 76 to the dollar and strengthened the rupee.
However, the rupee has again weakened against the dollar as its external value is a function of poorly performing macroeconomic fundamentals fuelling risk aversion amongst investors, local and foreign.
The upgrade by the international rating agency Fitch from CCC- negative to CCC, 11 days after the SBA, was expected and will undoubtedly be followed by Moody’s and Standard and Poor’s upgrading as well, which will lower the external borrowing costs for the country.
Given that the revised 2023-24 budget documents uploaded on the Finance Division website envisage 4.5 billion dollar borrowing from foreign commercial banks and 1.5 billion dollars through issuance of Eurobonds/international sukuk, this upgrade would imply lower applicable rate of equity borrowing.
What is however baffling is that the budget documents tabled on 9 June, three weeks before the SBA was reached, indicate the same reliance on external loans as those in the revised budget documents subsequent to the SBA – a consistency that indicates government’s optimism that it would be able to secure a deal with the IMF, Plan A, at best; or that the budget-makers made an unrealistic projection in the original budget documents at worst.
There is, however, a discrepancy of nearly 5 percent in the two documents in total external loans – 6,874,426 million rupees in the 9 June budget against the revised estimates of 6,541,063 million rupees, the difference being loans of provinces taken out of the calculation.
It is unclear whether this would imply that the federal government will no longer extend sovereign guarantees for their debt or whether that is no longer in the equation as part of the Fund programme.
The SBA will reach its scheduled end on 12 April 2024, assuming that SLA is promptly reached on all scheduled reviews, with intense speculation that the selection of the caretakers may determine the timing of the elections rather than the constitution that allows for elections to be held within 60 days if the national assembly is dissolved on the last day of its tenure and 90 days in the event of being dissolved anytime earlier.
An economist as a prime minister with possibly a comfort level with the IMF would indicate strict and timely adherence to all SBA conditions is a mantra being touted by many – an argument that belies the recent Fund staff’s engagement with senior leadership of all the three major national parties with the explicit objective of getting their buy-in of the SBA.
And while appointing serving or former Fund/multilateral staff as finance minister/governor State Bank of Pakistan has been a practice in the past, yet their selection can be sourced to the applicant’s lobbying with Pakistani stakeholders rather than any suggestion, tacit or otherwise by the multilateral they serve/served, who understandably assume that in their new official capacity they would safeguard the interests of the government/institution they serve rather than the ones they left.
Two further observations are in order. First, the mandate of the caretakers is limited in terms of circumventing the budget proposals – with respect to revenue collection and expenditure allocation (the SBA has also put a cap on any supplementary grant for the ongoing year).
However, this limitation should have led to presenting the budget for four months instead of the entire fiscal year, which political pundits argue leaves the door open for a longer term for the caretakers.
It is relevant to note that the PML-N presented the budget for 2018-19 even though its five-year term expired on 31 May 2018 by arguing at the time, that whosoever won the 25 July 2018 elections could amend the budget – a stance that allowed the party to present an election year budget which would facilitate the party’s re-election bid.
While the amended budget for 2023-24 is anything but an election year budget, especially after the amendments required to reach the SLA (given the nature and scale of the economic woes facing this country) yet one must also take note of the lack of a feasible narrative/discourse of the PML-N in recent weeks.
And secondly, the SBA agreement includes raising tariffs to achieve full-cost recovery, an economically viable goal, as a continuation of the suspended Extended Fund Facility programme with 2.6 billion dollars remaining undisbursed.
One would sincerely hope that instead of passing on the entire buck for incompetence of various sectors within the economy on the general public and falsely promising a future of economic stability and lower inflation, a promise that the hapless public has witnessed during the previous 23 programmes, structural reforms begin to be implemented that alone can break the vicious cycle of ever-rising tariffs to achieve full-cost recovery while safeguarding elite capture in terms of taxes and expenditure items.
Copyright Business Recorder, 2023
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