EDITORIAL: Moody’s is the first international rating agency that has commented on Pakistan’s post-election scenario and acknowledged that “while negotiations between parties to form a coalition government are currently underway” yet “even if a combination of parties successfully form a multiparty coalition government, the coalition may not be very united and politically strong.
The new government will face challenges in securing consensus to pursue difficult but necessary reforms, including revenue raising measures.” This observation is unlikely to resonate with domestic political and economic pundits for one simple reason: the Special Investment Facilitation Council (SIFC) staffed by federal and provincial members of the executive and senior most civilian and military personnel has shown ample capacity to deliver on all politically challenging pledges to the International Monetary Fund (IMF) under the ongoing Strand-By Arrangement (SBA) – a capacity that may overtly be seen as decisions that have been taken by the caretaker cabinet but without the full support of SIFC members such decisions would not have been possible.
Moody’s conclusion that “overall uncertainty around Pakistan’s ability to quickly negotiate a new IMF programme after the current one expires in April 2024 remains very high” has been a mitigating factor in securing an IMF programme loan in the past, before SIFC was established in late June 2023.
However, one would have to agree with Moody’s observations that there is “uncertainty around the extent of public protests because they may challenge the legitimacy of the new government. Social tensions may increase which would likely constrain the government’s ability to undertake reforms.”
There is no doubt that sustained high rates of inflation, hovering around 30 percent per month during the past year and a half have been fueled by: (i) an inexplicable massive rise in domestic borrowing by the caretakers (not part of the IMF condition) as well as by the 16-month-long Shahbaz Sharif-led government that crowded out private sector borrowing with a consequent negative impact on private sector borrowing and domestic output leading to factory closures and unemployment; and the (ii) administrative measures to meet the IMF-stipulated objective of full-cost recovery (the recent rise in gas prices is a component of that pledge to the IMF).
Simmering public discontent with poverty levels as high as 40 percent was already evident pre-elections, discontent that was not backed by any political party, however in the event that protests become more organized under a political banner then one may be compelled to heed warnings by Moody’s.
It may be recalled that former Finance Minister Ishaq Dar challenged Moody’s rating downgrade on 6 October 2022, the same day he announced an unbudgeted 110 billion rupees subsidy for exporters, in violation of the then ongoing IMF programme.
It is relevant to note that neither Moody’s nor the other two international rating agencies - Fitch and Standard and Poor’s – have upgraded Pakistan’s rating since then which, in turn, is the reason why the 6.1 billion dollars budgeted by Dar for the ongoing year under the head of borrowing from external commercial banks and through incurring debt equity (issuance of Sukuk/Eurobonds) has not materialized to-date.
The successful first review staff level agreement reached on 15 November, claimed by the caretaker finance minister as an accomplishment, was not followed by any upgrade by the rating agencies, as used to be the case in the past.
While the SIFC has (by now demonstrated) capacity to ensure implementation of politically challenging revenue measures, yet it falls short of not only compelling the administration to cut as opposed to increase the budgeted current expenditure (at the additional cost of heavy borrowing domestically) but has no influence over the country’s rating by international agencies and therefore the rate of return that would be charged by foreign commercial banks and Eurobond/Sukuk international market.
Copyright Business Recorder, 2024