EDITORIAL: Governor State Bank of Pakistan Jameel Ahmad, in an interview with a foreign news agency, stated that Pakistan intends to raise up to 4 billion dollars from Middle Eastern commercial banks and that Pakistan is at an advanced stage of securing 2 billion dollars additional external financing required for International Monetary Fund Board approval of the 7 billion dollars Extended Fund Facility (EFF) programme on which a staff-level agreement (SLA) was reached on 12 July 2024.
Three observations are in order. First, the actual budgeted amount from commercial banks abroad was 3,779 million dollars hence either the Governor rounded off the figure to 4 billion, or else, the requirement has risen by 221 million dollars a mere two months into the fiscal year.
Second, it is relevant to recall that the caretaker finance minister last year revealed that the government was not in a position to either issue sukuk/Eurobonds and, by extension, procure budgeted commercial loans from banks abroad due to the very high interest rates on offer, attributable to the country’s poor rating by the three international rating agencies.
Fitch post-SLA on the EFF upgraded Pakistan from CCC- to CCC+ - the lowest spectrum within the speculative grade - defined as very high credit risk just above the near-default cut off.
Moody’s upgraded Pakistan’s rating from Caa3 effective from February this year to Caa2 on Wednesday (yesterday), reflecting a balance of risks skewed to the upside but warned that there remained an uncertainty around the government’s ability to sustain reform implementation - an uncertainty exacerbated by the countrywide strike by traders against some of the new taxation measures and hike in energy tariffs. Standard and Poor’s has not upgraded Pakistan’s rating from CCC+ effective 22 December 2022.
It is however unlikely that even with small upgrades by two rating agencies premised on the approval of the EFF by the Fund Board which remains pending risks are perceived to be high and therefore interest rates on offer by commercial banks are not likely to be significantly lowered.
The governor’s interview revealed that Middle Eastern banks would provide the funds though it is unclear whether these banks would be able to offer rates that are more competitive than those on offer by Western banks though it must be borne in mind that even though Pakistan does rely on three friendly countries, including two Middle Eastern countries, to provide roll-overs, safe deposits and other loans at rates below what others are willing to provide yet commercial banks, wherever they are headquartered, cannot abandon their over-arching objective of ensuring that decisions are taken on purely economic grounds.
The governor recently briefed the parliamentary Standing Committee on Finance and Revenue, during which he said that the total repayment required in the current year is a hefty 26.2 billion dollars with 12.3 billion dollars commitments received with 4 billion dollars expected to flow back into the country (rollovers).
EAD released a chart of foreign assistance received in the first month of the ongoing fiscal year at 436.39 million dollars out of the total budgeted for the year at 19,393.16 million dollars (0.8 percent of the total) with the bulk disbursed by IDA (111.88 million dollars) followed by China (96.76 million dollars), ADB 54.05 million dollars and IBRD 20.54 million dollars. The inflows have to rise significantly to provide the comfort level to the IMF Board to approve the EFF.
It is evident that the country is caught in a debt vortex and until and unless we reduce our expenses, particularly current expenditure and simultaneously improve tax collection with horizontal and vertical equity, we would be unable to come out of the hole that we have dug ourselves into by simply borrowing more.
Copyright Business Recorder, 2024
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