March 15 was the date agreed for the second and final staff-level agreement (SLA) on the ongoing nine-month 3 billion dollar Stand By Arrangement (SBA) with the International Monetary Fund (IMF) – a deferral of 15 days from what was scheduled at the time of approval of the programme in July 2023.

A deferral of a scheduled quarterly review date is not unusual with the most common reason cited being more time is required (due usually to extraordinary external and/or domestic reasons) to meet the agreed time-bound conditions and/or structural benchmarks.

The Letter of Intent (LoI) dated signed by the two economic team leaders representing the people of Pakistan at the time - caretaker finance minister Shamshad Akhtar and Governor State Bank of Pakistan, Jameel Ahmed who purportedly was selected by the then finance minister Ishaq Dar - requested “rephasing of the access date for the second review to March 15, 2024, to allow sufficient time to complete our structural agenda…completion of the final review scheduled for March 2024 will require observance of the quantitative performance criteria (QPCs), indicative targets (ITs), and continuous performance criteria (PCs) with end-December 2023 test dates.”

The list cited does not specify any particular QPC, IT or continuous PC that would require the additional 15 days and therefore the general perception is that the fifteen-day deferral may have been requested to ensure that the newly elected government in general and whoever is appointed as finance minister in particular may have sufficient time to undertake the second and final staff review of the SBA.

The day the LoI was signed on 18 December 2023 the Caretaker government’s thinking was that: (i) the staff level agreement (SLA) on the SBA reached on 29 June 2023 was visibly secured by Shehbaz Sharif, and not the then Finance Minister Ishaq Dar who played a piddling/marginal role, reportedly no more than providing some logistic support, as he was accused by the Fund staff and coalition members/stakeholders for the break-down in reaching a SLA on the ninth review of the Extended Fund Facility programme (scheduled for November 2023 and allowed to lapse by June 2023 after the SBA was agreed); and (ii) after the triumphant much facilitated return of the party supremo Nawaz Sharif after a four-year absence from the country there was an overwhelming consensus, brutally mauled since, that a PML-N majority government would be elected.

A handful of local pundits have delinked political uncertainty post 8 February elections to any augmentation of challenges in meeting the pledges made under the SBA (or conditions imposed by any subsequent programme) by arguing that the empowered Special Investment Facilitation Council (SIFC), established on 17 June 2023 (before SLA on the SBA was reached) has by now a proven record of ensuring the implementation of all politically challenging conditions with the caretakers simply providing the façade of being decision makers.

There is much merit to this argument; however, it is almost certainly limited to engagement with multilaterals/bilaterals and timely delivery on pledged commitments.

SIFC, however, has been unable to deliver on the country’s rating by the three major international rating agencies, that, in turn, determine the cost of borrowing from the commercial banking sector abroad and through incurring debt/equity from issuance of international Sukuk/Eurobonds, budgeted at 6.1 billion dollars for the current year. Or, in other words, SIFC had little control over the loss by 2 cents of the dollar denominated government bonds with sovereign bonds slipping (September 2025 bond dropping to 85 cents on the dollar) the day after the elections.

The three rating agencies have not upgraded Pakistan’s credit rating post the SLA on the first review of the SBA reached on 15 November as shown in the Table.

The reason can be gleaned from the foreign exchange requirements for the current year enunciated by Jameel Ahmed during a press briefing in the aftermath of the Monetary Policy Committee meeting on 12 December 2023: total external debt repayments for fiscal year 2024 are 24.6 billion dollars, out of which 12.4 billion dollars are pledged to be rolled-over from friendly countries, 5.4 billion dollars have been repaid leaving 6.8 billion dollars as payment for the rest of the year – 4.3 billion dollar principal and 2.5 billion dollars interest.

This outstanding amount was to be paid off through borrowing from commercial banks and issuing sukuk/Eurobonds (or through debt equity). Sadly, that amount remains unattainable, a fact that was not considered by either the IMF team or the government’s team at the time of SBA approval.

The table provides Pakistan’s rating by three international rating agencies.

=====================================================================================================================Rating agency           Last update                              Second last update                 Third last Update=====================================================================================================================Moody's                 Caa3 (28 February 2023).                 Caa1 (6 October 2022)           B3 rating - negative                                                                                            from stable (2 June 2022)                        highly speculative and with                        likelihood of being near or in                        default, but some possibility of                        recovering principal and interest.Standard and Poor's     CCC+ (22 December 2022).                 B-(28 July 2022)               B-/B (30 August 2022)                        speculative or junk grade                        indicating a high risk of default                        on debt obligations.Fitch                   CCC (13 December 2023).                  CCC (10 July 2023)            CCC-(14 February 2023)                        Substantial credit risk                        Very low margin for safety.                        Default is a real possibility.=====================================================================================================================

Two observations are in order. First, ratings remained poor during the tenure of the Shehbaz Sharif-led government prior to the induction of Ishaq Dar as the finance minister (27 September 2022 till August 2023) however soon after he took oath his sustained defiance against implementing IMF conditions led to a further downgrade by Moody’s and S&P.

And second, a new precedent seems to have been set by rating agencies as neither the SBA approval in July 2023 followed by SLA on the first review on 15 November 2023, was followed by an upgrade by any rating agency.

Clearly, new rules apply to Pakistan as the economic morass deepens with each administration (civilian and military) resisting implementation of politically challenging structural reforms, a trend that continues to this day indicated by: (i) the IMF decision in the 2019 loan agreement to place the onus to secure financing from international partners on Pakistan as in previous programmes approval by the Fund generated the external financing requirements; (ii) the linkage of pledged assistance by our international partners, including the three friendly countries – China, Saudi Arabia, and the United Arab Emirates, on being on an active IMF programme prior to disbursement; and (iii) the rating agencies not responding positively to a programme or tranche approval by the Fund.

Standard and Poor’s analysis just prior to the scheduled 8 February elections projected Pakistan’s path for an upgrade to B “if the coming elections yield a government that has popular support and is able to work with key institutions in the country, it will have a better chance of securing external financing from the IMF.”

Moody’s comment post elections states that: “overall uncertainty around Pakistan’s ability to quickly negotiate a new IMF program after the current one expires in April 2024 remains very high…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.”

To conclude, in the event that the next Fund programme considered critical to avert the threat of default, is agreed rating agencies may well opt to adopt a policy of wait and see till key macroeconomic indicators begin to improve – indicators that are not majorly strengthened by borrowings, both domestically and externally, but show a reduction in current expenditure (not visible till-date), rise in taxes based on ability to pay rather than reliance on indirect taxes whose incidence on the poor is greater than on the rich and which constitutes 80 percent of all revenue today accompanied by major reforms in the energy sector, the biggest source of government debt today.

Copyright Business Recorder, 2024