EDITORIAL: The persistently high gross financing needs present a significant risk to the economy, challenging the government’s objective of consolidating the recently attained stability. This year, the government needs to raise Rs32 trillion to roll over maturing loans and finance the fiscal deficit.
The critical issue lies in meeting external debt repayments, where gaps have delayed the IMF board meeting, even though the Staff-Level Agreement (SLA) has already been achieved.
The finance minister initially expressed confidence that the IMF board would approve Pakistan’s programme in August 2024. However, there is nothing on the IMF’s board schedule for the remainder of the month. Now, exhibiting the same confidence, the minister claims it will happen in September.
A few weeks ago, the finance minister requested China, Saudi Arabia, and the UAE to roll over some debt (including safe deposits) for four years. The goal was to move away from annual rollovers, improve debt maturity, and enhance credit ratings. He was confident of success. However, sources indicate and the ensuing situation confirms that China has yet to respond to the request.
The delay in the IMF meeting is due to the requirement for assurances on the gaps in the gross financing requirement, which stands at around $2 billion for FY25 ($1.1 billion-1.2 billion already arranged through a deferred oil facility from Saudi Arabia). The remaining $3 billion in soft commitments for FY26 and FY27 is still awaited.
Government sources are downplaying the gap, casually stating that they have all the financing and are merely negotiating the terms. The question is how long will these negotiations take, and what is the real benefit of slightly lower costs when growing uncertainties due to delays are eroding confidence?
There’s a sense that the authorities are not being entirely transparent, possibly even hiding the facts, which fuels the rumour mills. The stark reality is that last year’s expectations of securing around $100 billion in investment have been replaced by the current struggle to fill a gap of over one billion dollars, which is stalling the much-needed IMF programme.
It also raises questions about the assumptions made by the IMF for debt sustainability. If the government is struggling to raise $2 billion financial assurance in FY25, how realistic is assumption of $7-8 billion of private credit inflows in the same year? Critics are questioning the government’s performance, particularly of the finance minister, who was generally expected to improve foreign funding by leveraging his illustrious banking career and relationships.
The bottom line is that delays in the IMF programme and the absence of foreign investment and loans are weakening the government. Commentators are becoming increasingly harsh while the government is growing desperate. Rumours of a technocratic government are gaining traction.
In response, the government is resorting to short-term measures and adjustments in the budget. First, the federal government announced a three-month subsidy for households consuming below 200 units of electricity. Later, the Punjab government announced a similar subsidy for households consuming 200-500 units for two months, which the federal government is being called upon to match for rest of the country.
On the taxation front, silent changes to the measures and methods for retailers are causing concern within the business community.
The perception of a weakening government seems to be pushing it toward populist measures such as unnecessary subsidies, which could have fiscal implications and negatively impact macroeconomic stability. More importantly, it implies slippage from agreed-upon reforms in the MEFP for the power sector with the IMF.
Pakistan’s political history is littered with unwise decisions made by outgoing, woefully weak governments. The country simply cannot afford more of the same.
The government must be open and transparent, fill the financing gaps, and assertively implement fiscal measures. Otherwise, the growing uncertainty in the coming months could cause irreparable damage. As they say, “A stitch in time saves nine” but only if you are willing to use the needle.
Copyright Business Recorder, 2024