It’s very normal, and natural, for milestones like the SLA (Staff-Level Agreement) to be followed by a barrage of ratings agency reports. Foreign investors still rely on their ratings when they commit serious money, after all, despite the humiliation of the 2008 recession.
Hence the finance minister’s zoom meetings with Moody’s and Fitch, regurgitating the same script with the same straight face. Push up our rating a notch because the SLA has come, the executive committee’s nod is coming (late August now?), and we’re ready to implement reforms, privatise SOEs (State Owned Enterprises), expand the tax net, etc.
But why didn’t they talk about the real meat of the reports both agencies released prior to the meetings? Moody’s, for example, appreciated that the EFF (Extended Fund Facility) – all but assured – would “improve Pakistan’s funding prospects”.
But that’s not all it gave its clients – the global investing elite that Pakistan wants to lure to its financial shores. It also warned that the Fund’s “upfront conditions” would grow harder by the tranche, reaching a point where a very unpopular government might struggle to enforce them. It said social tensions, driven by high cost of living, higher taxes and future energy tariff adjustments, could derail the Facility and threaten the government itself.
Fitch went a step further. After duly appreciating the SLA and of course the country’s “funding prospects”, its Business Monitor International (BMI) delved deep into Pakistan’s political economy and presented a 10-year risk profile. Politics aside – Imran staying in jail, surprising judicial sovereignty – it also said very clearly that the present coalition government is “likely to collapse in the event of a sharp increase in violence or a painful economic crisis prompting a widespread crisis movement”. It reckoned the government had about 18 months left in office, and an election would not follow.
The finance minister didn’t bring all this up in the meetings because he’s a veteran banker and knows how this bit alone, regardless of the “funding prospects”, would spook all serious investors. And he was lucky that the agencies didn’t either. Because that would have pulled on the thread that would have unravelled the fancy dress he’s been trying to put on the economy. It would also have exposed his first budget as the one that finally locked the Pakistani economy into a death spiral.
It’s not that a storm is coming and the government cannot see it. It’s much more sinister. It’s that the state created this storm, then nurtured it, allowed it to build, and now prefers to ignore it. Everybody’s worried about social unrest now because the government has piled too much tax burden on a small minority of honest, hard-working, middle- and lower-income class Pakistanis. It’s sinister because the state — regardless of the party in power – always chose to protect the rich and powerful from the tax net.
There was some hope when the banker-turned-finance minister promised to tax real estate, agriculture, wholesale and retail. The country desperately needs additional fiscal space to see the structural reforms of the EFF through, doesn’t it? And failure to meet “upfront conditions” will make IMF cancel the EFF and then Pakistan will default, won’t it? Let’s not forget that the country must pay back debt and interest worth $21bn this fiscal, and another $23 billion next year, while reserves stand at $9.4 billion. And the only thing keeping these “external financing needs” rolling over is an active IMF programme. Should it collapse, so will the economy.
So finally taxing the biggest, most bloated earners of the economy seemed right. That’s what common sense and basic economic theory say, and it’s also desperately needed. Yet nobody has ever done it. Not PPP, despite its slight (in theory) socialist leaning, not PTI even with its “revolution”, and definitely never PML-N.
All of them are stuffed with feudal and industrial barons that really rule this country, no matter who is in power. That is why the finance minister will no doubt walk away from this assignment with an impressive resume and contacts that will land him on fancy boards one day, but neither most Pakistanis nor the Pakistani economy are likely to remember him fondly.
This is the fifth-highest populated country in the world, most of it poor – about half hovering just above or below the poverty line – and also right at the top in terms of illiteracy, according to the UN. Now, even after enduring record inflation and unemployment, this year’s budget will force one of the world’s most cruel, parasitic tax regimes on them, while keeping the richest and most powerful lobby groups comfortably safe from the taxman.
If that does not qualify as criminal, the government is now taking it a step further and refusing to acknowledge the social time bomb that is just months away from exploding.
When hundreds of millions of people start getting bills that their entire incomes cannot cover, and the situation gets incrementally worse, and the big fish continue to eat off the fat of the land, then a social crisis is inevitable.
Yet nobody’s bothered. There’s no talk of a social safety net, no preparation for the rioting that anybody who looks at the country – including ratings agencies headquartered thousands of miles away – can see coming. And instead of making frantic preparations, they’re fishing for ratings upgrades.
Clearly, it’s not just basic economics that is not the Pakistani state’s cup of tea. It’s also too stubborn to learn from history.
Reminds you of a line from a Robert Redford movie.
When did Noah build the Ark?
Before the rain. Before the rain.
Copyright Business Recorder, 2024
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