By
Sankar Ray
Optimism
about 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 to 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 unprecedented financial
crisis that mocks at the slogan.
The
latest blow came from the New York-based global rating agency Fitch Ratings
that downgraded Pakistan’s long-term debt rating to ‘B-Negative’ due to high
debt repayment obligations, low foreign exchange reserves and 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 ended June 2018 from about 67 percent a year ago due to rupee depreciation
and widening fiscal deficit. Fitch foresees a further rise of the crucial ratio
to 75.6 percent in 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 6 December –
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 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
over-cautious.
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 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 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 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 percent of GDP in three
years, like the last Fund programme ending September 2016, to bring down fiscal
deficit to about 4 percent at the end of 36-month programme. In absolute terms,
the adjustment aims at Rs1 trillion of additional fiscal space with a mix of
increased revenues and reduced expenditures. The government has to gradually
trim the current addition to Rs30 billion a month in the energy sector circular
debt and bring it to zero within the first two years of the programme,
indicating a bleeding of other PSEs.
Needless
to say, the government is left with no alternative to 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 Christmas holidays for finalising the bailout package,
pending approval from the Fund executive board during the intervening period.
But the IMF is tough this time due to 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 circular
debt capping plan to address structural reforms relating to PSEs, seems
missing. The finance minister is yet to be up to the mark for calming of
nerves. The uncertainty is 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 tell people of
the need to embark on a path of austerity and reduction in 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. (IPA Service)
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