A bridge loan from Saudis is meant to buy more time, but may do the opposite. PHOTO: FILE
A new government has been elected precariously close to budget season. Ishaq Dar is about to be sworn in finance minister, and it is glaringly obvious that the new administration will need to approach the International Monetary Fund for a bailout, but the government seems to be dithering, hoping for aid from wealthy allies. The year is 2008. Or 2013, since the incoming administration seems determined to repeat the mistakes of previous governments.
In virtually every interview to the media since the election, Sartaj Aziz, the incoming adviser to the prime minister on finance and foreign affairs, has made it clear that the government does not want to approach the IMF for at least three to four months. And the Pakistan Muslim League Nawaz has leaked to the Financial Times that they are seeking up to $5 billion from Saudi Arabia as a bridge loan to allow the government time to implement its own agenda before approaching the IMF.
Sources familiar with the matter say that the PML-N is seeking a 10-year, low-interest-rate loan from Saudi Arabia and plans to use the proceeds almost entirely to pay off the existing stock of inter-corporate circular debt in the energy sector. Once the loan is received by Pakistan, it would then take about a month for the government to halve power cuts in the country, at least partially helping them fulfil their campaign promise of taking immediate action to resolve the energy crisis.
There are, however, at least three major issues with this approach. The first is that it hinges far too heavily on Saudi generosity. Riyadh has been known to rebuff many previous requests by Pakistan for assistance and the amount currently being sought is far higher than anything Islamabad has ever asked before.
Granted, the Sharifs have strong ties to Saudi Arabia, but the kingdom may be hesitant to hand over that high an amount to Pakistan, which even under the PML-N has had a poor record of managing its money properly. (That sordid history, by the way, is why China has stopped providing any form of budgetary support to Pakistan.)
The second problem is the damage that might happen in the wait before Islamabad eventually does enter into an IMF bailout programme. In 2008, for instance, the government was banking on US financial support to come through before finally being forced to turn to the IMF in the last quarter of that year. But by then, it was too late.
Depositors panicked at the sight of the government’s dithering and lack of a serious plan, and there was massive run on the currency, and the rupee plunged from Rs61.81 to the dollar at the start of the year to Rs79.32 at the end of it, a drop of over 28%. Inflation hit a record of 25.8% in August of that year as the government was forced to cut its unsustainable subsidies. That inflation spike sent interest rates soaring, precipitating a financial sector crisis that the banks have only just recovered from.
If the Saudis give anything less than $2 billion, that is effectively the scenario Pakistan will face once again. That is a deeply unpleasant thought, because it would mean wasting a whole decade going around the same crisis which just keeps getting bigger and bigger.
But the single biggest problem with this approach is the “what next” question. Suppose the Saudis are generous enough to give the whole $5 billion requested (unlikely). Given the pace at which circular debt accumulates, we will be back to unsustainably high levels of debt within a year or so.
In effect, the PML-N is giving itself a one-year window in which to work a miracle. To their credit, they have already started work on implementing a plan, but it seems highly unlikely that they will be able to meaningfully bring down the rate at which circular debt is rising within that period. At which point, we will just have a whole lot more debt and not much to show for it.
The Saudi loan, in effect, is less a way to buy time and more like a ticking time-bomb. The IMF route is likely to be more painful, but serious negotiations with the Washington-based lender tend to calm the markets, and buy more time. The PML-N would be wise not to repeat the same mistake.
Published in The Express Tribune, May 26th, 2013.
COMMENTS (35)
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For those asking for a solution.... here is one.
There is actually no need amend foreign & regional policies vis a vis Iran, China, US & India to raise money (Saudis or IMF).
Pakistan has refused on atleast 7 occasions (Punjab & Sindh have sabotaged this everytime) to bring a "Land Value Tax" (very different from Agricultural Earnings Tax & Urban Property Value Tax which have also been sidelined). With the propogation of the Land Value Tax and even a limited (partial & ineffeicient implementation....like so many things in Pakistan) would result in revenue generation in excess of 7 Billion in two tax years and after that incubation period add almost 2.5 Billion annually (there is a trade off with growth of enterprise)
So new revenue of at least 14 Billion within one assembly term.
If you do not want to know the merits of it then you do not need to read any more.
However, if you do want to knw then continue.
The problem is that almost 2/3rds of the parlimentary members will have themselves paying Land Value Tax (almost 70% of the last assembly did not pay ANY tax).( I expect every member to declare themselves landless while their two month old sons & daughter own tracts of land & being exempt for being kids.... such is Pakistan).
Studies in countries implementing such a tax have shown consolidated corporate ownerships and increased commercial investments as land (specially idle land) is seen as a BAD investment as the tax de-incentivises holding vacant land (a pass time in Pakistan).
5 billion to pay off cicular debt. last 5 years we spend 13 billion $ paying circular debt.. and frm tht amount we cn easily build bhasha dam.. use tht 5 to start bhasha construction..tht will bring down per unit cost..start hydel.. think long term. . bt unfortunately sharif always think short term..
@Asad Khan: Very balanced and constructive suggestions. I fully agree what you have suggested. We can divide your suggestions in three parts. 1. Short Term: Immediate attractive policy to adopt alternative energies not just the solar but wind and bio-fuels as well. 2. Medium Term: convert thermal units to coal. I would just disagree on gas because we shall be buying it from neighbours in future. So coal is the best option but at the same time modern facilities for coal mining should also be encouraged. 3. Long Term: Of course the hydel power and dams take longer time to build. The energy policy should be prepared for 25 years with protection given to investors through parliament.
The genie has come out of the bottle and no one can put it back in. Blame game continues. So if they get $5 Billion, would that solve the energy crisis - yes, until when. What no one talks about is the price that the consumers are paying for this unreliable electricity. After 17 years we know that the IPP policy of Benazir has failed miserably and it has given the country nothing but more misery and has stymied the growth of the economy. We have to sit back and look at the big picture and tell the Pakistani public what the IPPs are costing them per year, and how much are we selling that electricity for. Are we still against building dams including Kalabagh? Do we know how much the hydel power costs - pretty much next to nothing once the dams are built. The whole nation has to demand a concerted power policy with investments made to convert the existing furnace oil plants to coal and gas, to exploit our coal reserves, to build dams - small and medium size and remove all onerous taxes on solar technology to let consumers and businesses to import and install rooftop solar panels. There are no cheap and quickfix solutions left right now. Instead of going around begging the world, let's make a resolve to do this ourselves.
@TrueBlue43: The IMF imposes conditions before it gives any money. The Saudis presumably don't. The conditions that the IMF imposes are necessary for the country's economy. By getting a loan from the Saudis instead of the IMF the govt. is let off the hook and doesn't have to make any painful economic reforms. Instead they kick the can down the road and that only makes future reform that much more painful.
All of our problems are now tied with bringing in honesty, in whole, utmost comprehensively and there are no alternatives. We can't stop theft and losses in power while the rest of the country and system remains dishonest and rotten. It is like treating an infection in isolation when the rest of the body remains a breeding ground. We always forget that there is a substantial additional loss due to poor electric transmission and distribution infrastructure. Quite expected, Wapda is a very corrupt dept., how could we assume that those thousands of kms of high voltage transmission cables, distribution cables, transformers etc. are up to the standards. Living in a fool's paradise is not going to work any more. A hurtful truth is better than a beautiful lie.
@Junaid: I did not vote for PML-N so stop making childish assumptions. People like you still havent come to terms with a party which has mandate to rule for 5 years , regardless of rigging claims.
@shergayashergaya:
Oh bhai mere then WHAT IS THE SOLUTION ?
Which party and what policy of that party if the need of Pakistan ??
ATTENTION ALL PAKISTANIS
Please wake up from dreaming. THERE IS NO SHORT TERM SOLUTION WITHIN ANY PARTY WHICH CAN TAKE PAKISTAN OUT OF CRISIS IN JUST 5 YEARS.
And if still you dont like what I am saying, then keep dreaming!!!
@scotchpak: as a matter of fact they should amend the constitution to four year term which is more than enough to judge performance. the friendly opposition gave full 5 years to PPP and the situation went from bad to worst. they are equally responsible for all the mess as they governed more than half of Pakistan for 5 years. I still can not forget "qarz utaro - mulk sunwaro" and establish their own business outside Pakistan.
@Walayat Malik
I like your idea bro...but it is way too honest to be implemented!
Reality is that economy will get better on its own if electricity provision is fully restored to them. In order to tackle circular debt which in turn will improve power output, new government should establish a special police force for the sole purpose of stopping power theft and recovery of dues from private and public entities. All you need is 50 police officers hired just like Motorway police. They should not be under any current IG or DIG.
Before the election campaign PMLN was asking zardari to bring back the looted money why not now, what the sharifs are contributing from their pocket which they filled from pakistan now pakistan is asking for help, why not recover dues on gas, electricity, water bills and taxes which amounts to billions as we were told during election campaign.
The author is just assuming wrong doings.. and everyone knows that it will be far better government than anyone in the Pakistan's History. Always be optimist and not be pessimist.
Since half of the circular debt originates in Punjab, I suggest the much acclaimed for good governance PMLN government should consider paying up their share to set an example. They might have lured in more votes by shifting entire blame of the power crisis on PPP but now they are at the Center and blame game will not get them anywhere.
@Asif Butt: the author states clearly that Pakistan should talk to IMF, take their package and associated austerity measures on tax rate hike, power rate hike, tax net broadening, smaller government etc. IMF approval calms the nerves of investors. Saudi approval just makes us ask..so what next?
For the record, neither IMF, nor Saudi support is sustainable. Policies to improve revenue stream via broader inclusive tax net, reduction in corruption especially nepotism, accountability to reduce the menace of circular debt in power sector and improved law and order to improve investment climate is the sustainable route. Saudi vs. IMF support is the short term solution that helps buy time to put these long term measures into place.
And to be honest, I doubt PML(N) team is capable of the latter.
Dear Respected Author: If NS somehow manages this USD 5 Billion from KSA with a 10 year tenor, can you please explain how a shorter tenor loan (IMF) is better than that. The sustainable long term solution to this problem is reduction in curruption & negligence & finding lower energy sources for power production. This is what we have to manage somehow if we want to get rid of this monster of load-shedding.
How all the Nleagers getting in line with a begging bowl. The solution is rich pay tax and bill defaulters return money. Otherwise circular debt will rise again. Oh wait, all tax chors(taajir community) and rich are diehard supporters of pmln.
@Asif Butt: Its job of the govt to figure out what to do next. Not authors. Its democracy, he should criticise for a weak and dangerous plan by PMLN. You voted for them on empty promises, you did not ask them how they will fulfill these promises.
This article reads like a suspense novel!
The Saudi "loan" has been denied today.
Unstated conditions of KSA loan
Go slow ON Iran pipeline
Go slow on Saudi backed Hazra killings
Pakistan zindabad
Nathan
Saudi is also not in the same financial situation it was 10 odd years ago. Nawaz's personal relationship will help somewhat but don't expect them to open the coffers. A parallel task that must be done is to reduce power theft and get non payers to pay up. Wasnt one recently elected pmlm mna from lahore accused of power theft? Lets start with him. A high profile case will encourage the public and be a warning to others.
The best option is to pay your bill Mr Nawaz Sharif owner of Itefaq foundries.
Long lasting solution is to impose one child policy in Pakistan
The best and viable solution is to impose One Child policy in Pakistan for the next 3 years.
@fahad: China is not an option. It does not give soft loans. If Pakistan had not two times USA on Afghan Taliban and HQN, it would have been an option. Now it is not. So the only option is KSA with no back- up plan if they fail to come through at the level of aid that is expected.
The concerns documented in this piece are legitimate. One more issue is that even if the depositors do not panic the liquid reserves with SBP barely cover a month worth of imports and this has made it difficult to pay for adequate fuel to run the power plants to capacity contributing to he load shedding. How bad does the load shedding have to get before that issue alone will force the country to request an intervention? The assumption also seems o be hat IMF. Is just waiting to open its spigot of funds, it's just a matter of asking. The reality is that IMF may ask for prior actions hat may require 2-3 months o execute, so here is added risk in waiting until the last minute before approaching IMF.
PMLN will be compensating the nation by giving away UPSs !!! :)
SA is the worst option because it will gain more influence and more fronts for proxy religious wars (sectarianism) fronts will open. China is the best - though they have their business and geo-strategic interests.
A person given a chance to rule our country for the third time not by the people but by the establishment and international backers like USA & Saudi Arabia. Old wine in the new bottle! Do we forget their slogan of the past? Qarz Utaro - Mulk Sunwaro ??? Can anybody believe them now? Not me.
Actually the best option is to get the money of corrupt politicians, civil servants and generals back....
Excellent analysis Farooq, history does tend to repeat itself and it is the PML-N which has to manage the expectations it has built by lambasting the economy for more than 5 years. Ishaq Dar has a poor track record and Saudis are extremely stingy when it comes to giving out support. Ideal solution should be that Pakistan approach the IMF and also engage with the Saudis to get the funding in an appropriate risk. Also, the capital markets programme has to be reinitiated. Give a higher coupon, but get the markets to look at Pakistan again.
With all due respect pak urgently needs $5 billion dollars and imf is a death trap with their conditions so we have 3 stake holders who can help us. saudia USA and china. Saudia is by far the best option.
Dear AUTHOR OF THIS ARTICLE ,
Please stop pointing out what should not be done and suggest WHAT SHOULD BE DONE ???
Why does everyone know how and when to object. And why does the objector never discuss the actual alternates that should be pursued ?
The situation facing Pakistan would have been equally challenging to any party coming to power.
Why cant we all just accept the fact that it is immature to expect a magic plan from the government.
It will take different sorts of struggle and hanging out while waiting for things to turn well.
So stop being spectators and try to be part of the system and part of the progress.
People voted for nawaz because they we under the impression he would have learnt something from circular debt and Arabs jewish nature. Apparently he has not. Three year term of office should be sufficient for him. Lets try midterm polls this time around