EDITORIAL: Reports indicate that the government has managed to secure 1.2 billion dollars under the Saudi Oil Facility and 430 million dollars from the Islamic Development Bank under its International Islamic Trade Finance Corporation with the primary objective of advancing trade between Organisation of Islamic Countries (OIC).
The bulk if not the entire amount of 1.63 billion dollars is expected to be earmarked for import of fuel, which accounted for 2.8 billion dollars for two months (July-August 2024) as per the State Bank of Pakistan website. For fiscal year 2023-24, import of fuel (mineral fuels, oil and their distillation products) accounted for a whopping 28 billion dollars, and this in spite of the fact that the government was compelled to reduce imports of furnace oil (that led to power load-shedding) as well as petroleum products (as domestic demand plummeted due to very high inflation attributed to the rise in the international price of oil as well as heavy domestic taxation especially as reliance on petroleum levy as a source of revenue was increased) to support the worsening balance of payments (BoP) position.
In the current geopolitical context there is a real danger of oil prices rising even further in the event that Israel and the US attack Iran in retaliation against its 1 October missile retribution attack as Iran has already warned any attack would be followed by counter-retaliation that does not preclude disrupting the global supply chain.
It is important to note that these two facilities are likely to be on concessional terms; however, the government has also secured a pledge to receive one billion dollars from Dubai International Bank (DIB), which would be on market terms – a rate that would be offered based on the prevailing interest rate plus Pakistan’s associated risk of default as determined by the three international rating agencies.
Two of the three rating agencies, Moody’s and Fitch, upgraded Pakistan’s rating in recent weeks, however; they both retained the country within the high risk of default category and hence there is legitimate concern that commercial loans would be on offer at premium rates with some economists maintaining that the rates will be as high as 11 percent.
This view is strengthened by the fact that reports, not confirmed by government sources, maintain that debt equity – issuance of sukuk/Eurobonds – is unlikely this year, budgeted at one billion dollars for the year, due to the prevailing high cost of borrowing for the country premised on poor ratings. There is still no report of Mashreq Bank extending any loan to the country though there were reports in August that talks were under way with Mashreq’s management as well as DIB’s.
It is unclear as to what rate was factored into the budget documents that would give a ballpark figure of how much would the servicing payments rise, if at all, with implications on the deficit and therefore on inflation. However, one thing is clear: the government is still struggling to secure external financing arrangements to meet its expenditures and the shortfall to date is 4 billion dollars – 3 billion dollars from commercial banks and one billion dollars from debt equity.
The government had budgeted 20.4 billion dollars from external sources, a budget that was approved by the International Monetary Fund team, with 4 billion dollars from commercial banks abroad and only one billion dollars has been secured so far. While the IMF made securing these external funding amounts as a prerequisite for loan approval yet with the Board approval secured one may assume that the commercial banking sector may be more amenable to lending to the government though perhaps the rate on offer is unlikely to be negotiated to a more acceptable level.
It is also important to point out that this newspaper has been repeatedly recommending that the pressure to secure external loans at an unaffordably high rate of return can only be mitigated through voluntary sacrifice by the recipients of current expenditure – an option that the government appears to be rhetorically committed to though nothing has been definitively achieved so far. That must change.
Copyright Business Recorder, 2024
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