Pakistan's unending debt

Optimism about the translation of Pakistani Prime Minister Imran Khan Niazi's dream of carving out 'Naya Pakistan' is increasingly apparent as an 'intellectual error'. To put it bluntly, the dream was taken kindly by most seasoned analysts with acknowledged grasp over the polity of Pakistan. The grim reality is that the troubled state is now in a penumbra of an unprecedented financial crisis that mocks at the slogan.

The latest blow came from New York-based global rating agency Fitch Ratings that downgraded Pakistan's long-term debt rating to 'B-Negative', due to its high debt repayment obligations, low foreign exchange reserves and a fragile fiscal situation. Although there is apparent stability in the financial system, Pakistan's debt-to-GDP ratio shot up to 72.5 per cent during the last fiscal year ending June 2018 from about 67 per cent a year ago due to rupee depreciation and widening fiscal deficit. Fitch foresees a further rise of the crucial ratio to 75.6 per cent in the current fiscal year on additional rupee depreciation. This downgrading reflects heightened external financing risk from low reserves and elevated external debt repayments, as well as continued deterioration in the fiscal position. Moreover, sovereign debt service obligations over the next three years amount to $7-9 billion a year, including a $1 billion Eurobond repayment due in April next year. "External debt servicing will stay high throughout the next decade, with CPEC-related outflows set to begin in the early 2020s," states the rating agency.

Islamabad's liquid reserves continue to fall, having reached $7.3 billion on December 6 – equivalent to one-and-a-half months of imports – notwithstanding significant stabilisation efforts by the State Bank of Pakistan and the new government. Nonetheless, Pakistan Tehreek-e-Insaf did not take a single meaningful measure to expand the shrinking tax base, nor has it made the extra-large trading community cough up. "Political expediency stands in the way of the PTI government as it did during the PML-N tenure. A significant section of the local industry, especially one connected with construction, has been forced to reduce production, bringing down its share in the taxes and adding to unemployment," points out an editorial in Pakistan Today. Indeed, the trauma that the market has been passing through under the new government, let alone the agonies from repeated devaluations and interest rate hike, make foreign investors certainly overcautious.

The governor of State Bank of Pakistan, Tariq Baja, warned of further depletion in foreign exchange reserves if the dollar exchange rate against Pak rupee was not jacked up. Keeping the imperative of striking an 'equilibrium' on the exchange rate, he assured that efforts were on to keep the exchange rate stable."The exchange rate adjustment was not done happily but there was no other way out. I was in contact with the minister of finance on this issue and took him on board but did not know anything about his interaction with the PM," he stated while testifying before the Senate Standing Committee on Finance under the chairmanship of Senator Faros H Naek last week.

Those who look up with a glimmer of hope after the 500-plus point rise in the market as a sequel to the second tranche of the $1 billion Saudi bailout package received at the central bank, ignore the effect of downgrading in credit-rating. The reserves are now below $8 billion, forcing Islamabad to accept the IMF package, however tough it is.

Islamabad submitted its Memorandum of Economic and Financial Policies to the IMF, envisioning macroeconomic stabilisation graduating into a growth strategy over the next three years, confirmed Finance Minister Asad Umar. Reportedly, the MEFP plans a fiscal adjustment of approximately 2.5 per cent of GDP in three years, like the last Fund programme ending September 2016, to bring down fiscal deficit to about 4 per cent at the end of the 36-month programme. In absolute terms, the adjustment aims at Rs 1 trillion of additional fiscal space, with a mix of increased revenues and reduced expenditures. The government has to gradually trim the current addition to Rs 30 billion a month in the energy sector circular debt and bring it to zero within the first two years of the programme, indicating a bleed of other PSEs.

Needless to say, the government is left with no alternative to the imposition of a series of taxation measures to increase revenues, covering new areas like agriculture, real estate and others, as the IMF wants. The IMF mission is expected to return to Islamabad after the Christmas break to finalise the bailout package, pending approval from the fund executive board during the intervening period. But the IMF is tough this time due to the compulsion of capacity constraints that dog the committed monetary policy graduation to complete inflation targeting within 2020.

Yet, the preparedness in finalising the adjustment sequencing, including the circular debt capping plan to address structural reforms relating to PSEs, seems missing. The finance minister is yet to be up to the mark and uncertainty certainly lies ahead. He has to explain the compulsion of devaluation that the IMF insists on. The high-growth trajectory is a bit remote but the PTI government has to ensure transparency in all its actions. Even keeping the task of welfare governance in perspective, it has to inform people of the need to embark on a path of austerity and, thereafter, reduce development expenditures significantly to reverse the severe balance of payments crisis. At the same time, there is an urgent need to tax the elite and the upwardly mobile segments, keeping the lower end of the income and asset distribution at bay and rid them of the brunt of austerity measures. Studies made by UNDP and Oxfam have noted a disturbing surge in economic inequality in the past two decades, despite a perceptible reduction in poverty.

(The views expressed are strictly personal)