EDITORIAL: Finance Minister Muhammad Aurangzeb met with representatives from Standard and Poor’s and Fitch on the sidelines of the spring annual meetings of the World Bank/International Monetary Fund and highlighted positive macroeconomic indicators on the back of the ongoing Stand-By Arrangement (SBA) on which the second and final staff-level agreement was reached on 20 March 2024 though formal approval by the Fund Board, a prerequisite for the tranche disbursement, remains pending.
The Finance Minister reportedly had met with Moody’s representatives, the third major global rating agency, a few days earlier. His engagement with representatives of all three rating agencies must be appreciated as instead of using threats, like his predecessor, he chose to emphasise the easing of government’s liquidity and external vulnerabilities reflected by the increase in foreign exchange reserves, even though they are sourced mainly to debt, and the re-engagement of multilaterals and bilaterals that would ensure an easing of external vulnerabilities.
Rating agencies have an extremely critical input into Pakistan’s economy because of the increasing reliance placed on borrowing from commercial banks abroad as well as the issuance of debt equity (sukuk/Eurobonds) to meet the budgeted expenditure.
In 2022-23 the government budgeted 1389.7 billion rupees borrowing from commercial banks abroad but could realise only 521.5 billion rupees due to failure to reach a staff-level agreement on the ninth Extended Fund Facility programme (suspended thereafter) that, in turn, led to a downgrade in our rating by these three agencies pushing up the rate at which borrowing was available to Pakistan.
Additionally, last fiscal year the budgeted 372 billion rupees from sukuk/eurobond issuance did not materialize, again because the rates on offer were uneconomically high. These two factors led to a deficit that was much higher than budgeted, leading to a massive rise in inflation.
This fiscal year 1305 billion rupees has been budgeted as commercial loans and 435 billion rupees sukuk/Eurobonds, which as per the then Caretaker Finance Minister early this year could not be realized due to uneconomically high rates on offer.
Thus if Aurangzeb intends to procure loans from these two sources then easing the concerns of rating agencies is extremely important. It is important to note that assurances by a finance minister rarely if ever lead to an upgrade by the three global rating agencies.
What they typically want to see is data that unambiguously indicates that there has been an uptick in all relevant indicators including exchange reserves, and their source, and explicitly in Pakistan’s case, whether the reform agenda is not only in process (with particular reference to the power sector, a major source of debt for the government, and the tax sector, which continues to rely on indirect taxes whose incidence on the poor is greater than on the rich) but that an IMF programme is on track to strictly monitor the pace of these reforms.
That the next IMF programme loan has been formally sought and a mission is expected to arrive next month to engage in negotiations on a set of conditions, qualitative and quantitative, would without doubt send a comfort level to the rating agencies.
What is however critical for the government is to try to increase its own leverage with the Fund staff in terms of the pace of reforms, given that the capacity of the general public to withstand the burden of administrative measures (raising utility rates as well as sustaining petroleum levy at 60 rupees per litre) continues to be compromised from one month to the next due to a persistently high inflation rate, the shrinking of the growth potential that has undermined the ability of the private sector to raise salaries and the lay-offs in sectors unable to sustain their output with the rise in their input costs.
One way out of this dilemma in the short term (up to one year) would be to seek voluntary sacrifices from those who are major recipients of the current expenditure, initiate pension reforms that would make it mandatory for public sector workers to contribute to their pensions instead of the entire amount being paid for by the taxpayers’, and a cap on domestic and foreign borrowing that, if not adhered to, should lead to heads being rolled.
Copyright Business Recorder, 2024