EDITORIAL: Of all the things Finance Minister Muhammad Aurangzeb mentioned at the Islamabad literature festival the other day – tax reforms, privatisation, CPEC, etc. – the most chilling was the revelation that no country is willing to offer deposits to Pakistan or roll over loans any longer.
He was referring to China, Saudi Arabia and the UAE, no doubt, since their help in beefing up SBP’s (State Bank of Pakistan’s) reserves over the last few years has been crucial for keeping the economy solvent and even finalising the latest IMF (International Monetary Fund) bailout programme.
This was the first time the Fund included this stipulation in its rather harsh upfront conditions; that Pakistan must first secure deposits and rollovers from friendly countries.
And it put the finance ministry in quite a fix for a while, since these countries had earlier made their help contingent upon an active IMF programme. Yet the minister was eventually able to wriggle well enough to avoid the axe and convinced all three countries to bail us out one more time.
Now, going by his own remarks, such help might no longer be forthcoming, which is very bad news since most of the country’s forex reserves are made up of these foreign loans from friends whose help we’ve got used to taking for granted.
This would complicate the government’s contingency plans, if it has any, in case the EFF (Extended Fund Facility) goes off-track because the last communicated understanding with these countries was, once again, that their help required Pakistan to be on an IMF facility.
Let’s not forget that the last time an EFF was suspended, these countries also withheld their fiscal assistance.
And that triggered a crisis of confidence in the international market and the rupee began its epic fall in the dying days of the PTI (Pakistan Tehreek-e-Insaf) government and dogged the PDM (Pakistan Democratic Movement) setup throughout its tenure.
The finance minister also waxed eloquent about his successes in stabilising the economy, yet there are rumours that the bailout facility is in trouble right from the start.
And since revenue shortfall, which created the need for a mini-budget so early in the fiscal, will remain a problem throughout the programme, he should be more transparent with a market looking forward to milking the dovish interest rate cycle to ramp up production, exports, and profits. Perhaps he should give some attention to some of his unfulfilled promises, like facilitating foreign investment and expanding the tax base.
The idea behind attracting more FDI (foreign direct investment) was precisely to break the bad habit of surviving on foreign dole outs. Yet there’s been much talk and not much on-ground movement in terms of cutting unending bureaucratic red tape in the way of that kind of investment.
A more equitable tax structure, too, would have reduced the burden on working middle classes that pay their taxes and enabled FBR (Federal Board of Revenue) to meet IMF’s strict targets. But the government chose to continue protecting the highest earning sectors from the taxman only because they have the power and nuisance value to stay out of the net.
And now we’re another step closer to collapse. Let there be no doubt that the EFF is the only thing keeping the country from certain sovereign default. Should it be revoked, for whatever reason, the Pakistani government will lose the confidence of foreign lenders and its reserves will not be able to meet debt and interest payments that would become due.
And, according to the finance minister himself, now we do not even know if we will be able to count on old friends to park more of their money in the central bank’s vaults to make our reserve position look pretty.
Copyright Business Recorder, 2024
Comments
Comments are closed.