EDITORIAL: Moody’s Investors Service further downgraded Pakistan’s local and foreign currency issuer and senior unsecured debt rating from Caal to Caa3 on 28 February - the second downgrade since 6 October 2022 - which, in Moody’s view “would also apply to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd.
which are direct obligations of the government of Pakistan.” The reason for the downgrade is not the possibility/probability of failing to complete the ninth review of the International Monetary Fund (IMF) as “despite recent delays, Moody’s assumes successful completion of the ninth review of the existing IMF programme” but “weak governance and heightened social risks (that) impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments.”
The claims of changing the goalposts earlier agreed during the ninth review discussions by the Fund with Pakistani authorities, as highlighted by sections of the media reportedly briefed by senior officials of the Ministry of Finance, may be a last-ditch attempt to browbeat the Fund into phasing out its extremely harsh upfront conditions – a tactic unsuccessfully used by Shaukat Tarin as well as Miftah Ismail that merely led to considerable delays in agreeing to the scheduled sixth, seventh/eighth IMF mandatory quarterly reviews. The reason: severe trust deficit with the Fund staff pointing to more than a three-decade-long failure by successive administrations to implement agreed reforms in the power and tax sectors as well as improve governance in state owned entities accounting for massive annual budgetary injections.
To maintain that IMF’s prescriptions are always economically sound and appropriate within a specific country context is untenable given that they have been challenged again and again by former staff members/internationally recognised economists including Joseph Stiglitz, a Nobel laureate, with empirical studies showing a poor record in turning low income/highly indebted economies into developed economies. But, then so is the recent tirade against the Fund in reports being sourced to the Ministry of Finance.
For example, the claim that the end of the mission press release issued on 9th February was watered down during the approval process abroad where some influential quarters were said to be more political than politicians is a narrative that defies logic as not only did the press release note that “considerable progress was made during the mission on policy measures to address domestic and external imbalances,” but the Finance Minister addressed a press briefing the next day, claiming that “there was agreement with the Fund on the broad contours” while inexplicably adding that the Memorandum of Economic and Financial Policies had been received (a document that is very specific in detailing the time bound actions and structural reforms required/agreed).
The government’s positive spin on 170 billion rupees of additional revenue measures till end June was not in synch with the Fund’s press release that referred to permanent measures (into next year). What the government can and must be faulted for is the decision not to ensure that these measures envisage widening the tax net (for example bringing in traders into the tax net) but the focus of the mini-budget is on raising existing tax revenue through heavy reliance on indirect taxes whose incidence on the poor is greater than on the rich.
The power sector, as noted in the Fund press release, must prioritise “preventing further accumulation of circular debt and ensuring the viability of the energy sector” with the now reported Finance Ministry narrative bafflingly being that this implies that the surcharge of 3.39 rupees per unit would be effective only till end June while from 1 July onwards the surcharge would be 1.43 rupee per unit – an amount that is neither sufficient to prevent accumulation of circular debt nor ensure the viability of the energy sector.
The Fund also urged the government to allow the exchange rate to be market determined to gradually eliminate the foreign exchange shortage but extremely disturbingly while the control on the interbank rate was lifted on 26 January, which led to the announcement of the arrival of ninth IMF review mission on 31 January, the grey market (estimated at between 35 to 40 rupees per dollar – or the difference between the controlled interbank rate, the open market rate and the rate at which dollars were actually available) that had dissipated has disturbingly resurfaced in recent days as the private sector’s demand for dollars to clear 5,000 plus containers at the country’s ports continue.
To maintain that the Fund must take account of the outflow of dollars by Afghanistan must be seen in light of the statement of Zafar Paracha, Secretary General of the Exchange Companies Association of Pakistan, that traders and smugglers were transferring up to 5 million dollars a day; however, this comes to around 1.8 billion dollars every year – an amount which is most concerning but must be seen in the context of the flawed policy of controlling the interbank rate which cost the country over 2 billion dollars in remittances in seven months alone.
And finally, throughout the ongoing programme (effective 1 July 2019) the Fund has insisted on the precondition of securing pledged assistance and roll-overs till programme-end. As per Moody’s, Pakistan’s “external financing needs for the rest of the fiscal year ending June 2023 are estimated to be around $11 billion, including the outstanding $7 billion external debt payments due. The remainder includes the current account deficit, taking into account a sharp narrowing as imports have contracted markedly.” To date, according to Moody’s, of the 3.3 billion dollars refinancing from Chinese commercial banks, Pakistan has received a deposit of only 700 million dollars (announced by Dar) on 24 February.
The ongoing Fund programme is critical to averting the prospect of default in spite of the obvious fact that Pakistan would need to go on another IMF programme as soon as this one is completed. It is quite probable that the harsh upfront conditions of the ongoing programme may then seem like a walk in the park. It is time for the economic team to accept responsibility rather than passing on the buck to others because at the current state of the economy the only way to increase leverage with the Fund is to embark on a rigorous reform agenda, improve governance and engage in meaningful, not cosmetic, belt tightening.
Copyright Business Recorder, 2023