The last week of 2022 was quite eventful. Pakistan’s top civilian and military leadership in two separate but identical meetings discussed the two most pressing issues -deteriorating security situation and for the first time very high and genuine risk of a sovereign default.
A two-day Corps Commandeers Conference was followed by a meeting between the Chief of the Army Staff General Syed Asim Munir and Prime Minister Shehbaz Sharif on the very next day. A day after -December 30th, 2022- the top military and civilian leadership was again sitting under the umbrella of the National Security Committee.
The official time of the NSC meeting was one hour and 30 minutes but due to gravity of the situation the committee could not conclude even agenda number one -the Economic Situation of Pakistan- despite debating the issue for well over three hours.
On January 2, 2023, the NSC was again in session. Analysts had high hopes that this time Pakistan’s leadership will come up with a clear roadmap to save the nation of 230 million people from the humiliation and suffering, to be followed by a sovereign default.
The opening statement of the NSC handout was very encouraging, immediately giving a sense that finally the leadership has stood to the occasion. “The forum underscored that comprehensive National Security revolves around economic security and that sovereignty or dignity comes under stress without self-sufficiency and economic independence”.
It had given hopes that the dignity would be chosen over petty political interests and the leadership might have decided to abandon the path of carrying all the time a begging bowl in hand and bowing before the Saudi King, Salman bin Abdulaziz Al Saud, and attempting to appease Chinese President Xi Jinping.
But the next paragraph was equally disappointing, as the hopes for a dignified life ahead died in less than 30 seconds. “The finance minister briefed the forum about the economic stability roadmap of the government including the status of discussions with international financial institutions, exploring other financial avenues based on mutual interests as well as relief measures for common people. In order to strengthen the economy, the committee agreed on undertaking concrete steps including imports rationalisation as well as preventing illegal currency outflows and hawala business”.
The statement further reads that “emphasis will be especially made to improve agricultural output and manufacturing sector to ensure food security, imports substitution and employment. It was resolved that people centric economic policies with trickle down effects to common people will remain priority. It was also agreed to involve all stakeholders for consensus to realize effective and fast track economic recovery and roadmap”.
To the disappointment of many, the statement was silent on a clear commitment to make all out efforts to revive the stalled International Monetary Fund programme that is critical for avoiding the default, as any bailout package by Saudi Arabia or China cannot eliminate the threat of default, permanently.
“The National Security Committee was satisfied and there is nothing to worry about”, said Finance Minister Ishaq Dar, responding to a question by media on January 4 that the NSC’s handout was vague on the IMF question and it talked more about long-term plans.
His next few statements further made it clear that the government would simultaneously follow the path of the IMF and bilateral loans -with more focus on bilateral loan options and selling some state assets in an ambitious plan.
Dar lays out plan
“Saudi Arabia is expected to beef-up reserves in days”, says the Finance Minister. It is understood that the request for $3 billion bailout package is on the desk of Saudi King, Salman bin Abdulaziz Al Saud, for approval. Will it help? Yes. But only for three months.
Ishaq Dar has also said that his government is also working on government-to-government transactions, which include sell-off of assets and divestment of shares but it will not happen overnight.
While showing urgency of the matter, the government of Prime Minister Shehbaz Sharif had enacted the ‘Inter-governmental Commercial Transactions Act 2022 to sell the state assets mainly, two power plants and shares in the listed blue-chip companies to the royals of Qatar and the United Arab Emirates.
Despite the enactment, no asset could be sold, which the royals have demanded in return of money as they too are fed up of giving loans after loans to Pakistan but with no improvement in our behaviours.
Shehbaz Sharif had made this plan after his visits to Saudi Arabia and the UAE ended in sheer disappointment, with no country ready to give cash handouts.
The traces of Dar’s plans are found in the IMF-Pakistan staff report of August 2022. “The FY23 official financing includes $7 billion as rollovers of existing and US$4 billion in additional financing commitments, including from China, Qatar, Saudi Arabia, UAE, and IFIs (such as the World Bank, Asian Development Bank, and Islamic Development Bank)”, IMF 7th and 8th Review Report, August 2022.
The discussions with these countries have been ongoing for the past eight months. Dar said that the sale of the two LNG power plants and shares of the government listed-companies under the government-to-government deals were the low-hanging fruits.
Is Pakistan really committed to IMF programme?
We have discussed that the NSC statement is silent on the IMF path. Finance Minister Ishaq Dar too has given a message, albeit a not very clear one.
The “government is committed to the IMF programme”, said Dar on January 4th. At the same time, he adds: “We will not take measures that may increase burden on the common man” – a statement that will not go well with the IMF demands.
The IMF has asked for a plan to end additional Rs500 billion circular debt, increase in energy prices, imposition of new taxes, letting the rupee gain its real value and achieve the primary budget surplus targets, excluding flood related expenses – the conditions that will stoke inflation that is already standing at 25%.
The revival of the IMF programme would require increase in electricity prices, imposition of new taxes and letting the rupee gain its real value by ending administrative controls introduced by the State Bank of Pakistan.
Saying inflation was very painful, that was why he reduced fuel prices thrice and kept them stable for the past three months Finance Minister raises a question in return. “Can we put burden on the nation in these circumstances, no we cannot.”
On Saturday, Prime Minister Shehbaz Sharif reaffirmed the government's resolve to complete the terms of the IMF programme as well following a conversation with the lender’s chief. Taking to his official Twitter handle, the premier announced that during a telephonic conversation with the IMF Managing Director Kristalina Georgieva he informed her of his "government’s resolve to complete the terms of IMF’s programme."
Sources earlier told The Express Tribune that the prime minister urged the IMF managing director to review the condition about imposition of new taxes. He also sought relaxation in the demand to increase electricity prices to compensate for the deviation of around Rs500 billion from the annual circular debt management plan.
These remain the major stumbling blocks in reaching an initial understanding for a staff level visit by the IMF to Pakistan. “However, the government stood ready to impose flood levy and windfall income tax on commercial banks,” they added.
There was also a resolve from the Pakistani side to increase the energy prices in future against any further deviation. It was not immediately known whether the IMF MD promised to give any concessions.
Where we stand today
Pakistan is very near to a sovereign default -even more than what many know and think.
The government’s gross official foreign currency reserves stood at mere $5.8 billion as of December 23. These are meant to slip further below the danger level ahead of some payments. From January to March 2023, Pakistan is required to make $8.5 billion repayments, including $4 billion to China and the UAE on account of cash deposits.
Although, the government claims that it has made arrangements for the $32 billion gross external loans for this fiscal year but these plans are not workable without the IMF support.
Details seen by The Express Tribune suggest that the $32 billion plan was too optimistic to materialize in the absence of the IMF umbrella. The government still believes it can raise $1.5 billion by floating Eurobonds and has made it part of the external financing plan. Another net $300 million are projected on account of Naya Pakistan Certificates (NPC).
As against the budgeted over $7 billion foreign commercial loans, the Ministry of Finance still sees $6.3 billion materializing in the current fiscal year, a figure that also appears highly optimistic. The government is pinning its hopes on China rolling-over its foreign commercial loans worth $3.5 billion and non-Chinese banks not taking back their loans worth $1.3 billion.
Ishaq Dar says that $1.2 billion worth two Chinese commercial loans will arrive soon, which Islamabad had returned earlier. So far, however, both the Chinese and non-Chinese commercial banks have stayed away from extending their loans due to the adverse impact of Pakistan’s junk credit rating on their overall balance sheets.
The government expects that it will be able to get fresh foreign commercial loans worth $1.5 billion in the current fiscal year, an assessment that may not be true without the IMF programme’s revival. Foreign commercial banks are now demanding an interest rate much higher than 10%, which the government cannot politically afford.
The government expects that it will be able to get the $7 billion loan rolled-over by China and Saudi Arabia, a projection that is accurate. Saudi Arabia has already rolled over $3 billion, while Pakistan has requested China to rollover the $4 billion maturing in this fiscal year.
It hopes to receive $11 billion from the multilateral creditors, but its materialisation depends upon the revival of the IMF programme. So far, the Asian Development Bank has been helping Pakistan in a major way, but the World Bank is looking towards the IMF.
What lies ahead?
The government has apparently taken a risker and longer path of begging from foreign nations to avoid the risk of default. The decision to sell the assets is good but it may not materialise in next few weeks.
The reserves are at critically low level. In case Pakistan defaults, the economic wheel in short-term will come to a halt, the nation will suffer, the imports would be cut to critical goods that too at advance payments and cars and the motorcycles will not have the luxury to go to the pump any time and get the tank filled.
It is high time that the government should start thinking about the debt restructuring, including foreign and domestic. The decision to take more loans from Saudi Arabia will keep complicating the problems in longer term.
For this fiscal year, Pakistan needs $23 billion in foreign debt repayments, which is the direct result of such decisions of taking loans from foreign nations. The $23 billion repayments include $4 billion China deposit, $3 billion Saudi Arabia deposit and the $2 billion UAE deposit.
If the decision is to enhance the Saudi deposit to $6 billion and make a claim that the sovereign default has been averted then its cost will be too high to bear in the longer run.
The government’s dilemma is that should it protect its whatever remaining vote bank by not going the IMF or protect the economy by going to the IMF. However, it immediate preference seems protecting the vote bank but it may end up losing the both due to hyperinflation likely to be followed by a default.