EDITORIAL: On 21 August 2024 Finance Minister Aurangzeb in a text message to a foreign news agency said “we are making good progress with the International Monetary Fund Board approval in September”, however during his interaction on 3 September with domestic media he refrained from giving a deadline fuelling speculation that “good progress” may take some more time to come to fruition.
Exactly a week earlier, on 27 August, Governor State Bank of Pakistan Jameel Ahmed gave an interview to the same foreign news agency during which he stated that the country was aiming to raise 4 billion dollars from Middle Eastern commercial banks to plug its external financing gap. This statement needs clarification for three reasons.
First, precisely which financing source that was budgeted requires to be plugged. Jameel Ahmed in the interview claimed that Pakistan was at an advanced stage of securing 2 billion dollars of additional external financing required for the IMF Board to approve the 7 billion dollars Extended Fund Facility programme on which the staff-level agreement was reached on 12 July.
Second, the budgeted amount for external commercial and Eurobond/sukuk for the current year was 676 billion rupees (which translates into 2.4 billion dollars at the budgeted rupee-dollar parity of 278). This doubling of reliance on a source of funds that are considerably more expensive than those that can be secured from multilaterals and bilaterals and with a much smaller amortisation period indicate a shortfall in another budgeted external inflow, and/or a shortfall in domestic tax collections (a 98 billion rupee shortfall was announced by the Federal Board of Revenue against what was targeted in the first two months of the current year) and/or a rise in expenditure, which does not form part of the Finance Division’s Economic Update and Outlook and therefore is not known at the present time; or what is more likely an amalgam of all three.
And finally, the rate on offer to secure the 4 billion dollar commercial loans is not yet clear.
True that Fitch and Moody’s recently upgraded Pakistan’s rating; however, there are two caveats, notably that the rating upgrade retains Pakistan in the high risk category and second it was in light of the staff-level agreement reached on the EFF that remains pending Board approval.
Be that as it may, reports indicate that Pakistani authorities held a virtual meeting with the top management of the Dubai Islamic Bank and Mashreq Bank in the second to third week of August, which no doubt prompted Governor SBP to inform the foreign news agency that the country was aiming to raise 4 billion dollars; however, it has been more than two weeks since and the silence on the issue is giving rise to speculation that no agreement has been reached on the rate on offer and/or perhaps the amortisation period is too short.
The Finance Minister together with the Power Minister visited China recently to no doubt discuss the rollovers and seek additional loans; however, reports indicate that the major stumbling block in the talks was the inability of the government to clear its contractual financial obligations to the Chinese Independent Power Producers (IPPs) established under the umbrella of the China Pakistan Economic Corridor (CPEC) in 2015.
To date there has been no report of a high-level visiting Dubai Islamic bank or Mashreq Bank team in Islamabad and no report of an impending visit by the Finance Minister to directly engage with these two banks. These are worrying indictors and one would hope that some sort of a deal is struck as without the IMF Board approval, the bilaterals will not extend rollovers or loans and the country would inch closer to default.
It is obvious that the economic managers are between a rock and a hard place and disturbingly while the rock reflects lender refusal to entertain any deviation from a rigid upfront conditions that are exacting a heavy price from the public yet the hard place implicates the elite capture of the country’s resources (budgeted expenditure) as well as the source of these resources (taxes).
Copyright Business Recorder, 2024
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