What is Mr Dar up to?

A prominent feature of the well-known path of dependency that Pakistan’s economy follows is the reliance on foreign economic assistance to finance the fiscal and the current account deficits. As long as the external inflows are reasonably higher than the outflows, finance ministers feel secure in their job and congratulate themselves on successfully avoiding the threat of default. Some even tend to brag about it and claim having regained the confidence of the world of finance. This is exactly what Finance Minister Ishaq Dar is doing in his bid to seek $12 billion in external loans over a period of three years. Forgetting all about the PML-N’s hifalutin fireworks about kashkol, he prided in the speedy fulfillment of the prior conditions laid down by the IMF and the debt enhancement of $1.3 billion. There was, however, no need to make the fantastic claim that the new loans would leave the stock of outstanding debt unchanged, unless he is thinking of debt renegotiation or rescheduling. International financial institutions (IFIs), the largest creditors to Pakistan, do not reschedule anyway. They are willing to lend more to ensure debt servicing. Bilateral or the so-called Paris club debt can be rescheduled, but it is less than half of the IFI debt, if the IMF debt is also included.



The problem facing the finance minister is that there was a net outflow of resources abroad in 2012-13, resulting in a fiscal deficit of eight per cent financed entirely by domestic borrowing. Foreign borrowing is cheaper than domestic borrowing. Around 80 per cent of the domestic borrowing was bank borrowing, an inflationary time bomb. What the finance minister is trying to do is to increase the component of foreign borrowing. This may be a cheaper source, but its servicing requires foreign exchange. Total external debt and liabilities are still within manageable limits but the foreign currency required to service it is in short supply, mainly for the IMF debt due in a relatively shorter period.

Pragmatism demands this approach in the short run. However, one does not see the makings of a strategy to bring foreign exchange earnings and payments into balance, just as there is no credible programme to balance revenues and expenditure. There is a lot of talk about growing out of the crisis by accelerating the rate of investment through mega projects in partnership with friendly countries. However, the rigidities in the structure of the economy would not make this task any easier. Energy and food subsidies, growing burden of ensuring national security, adverse international economic developments and recurrence of disasters, such as floods, add to debt. In 2012-13, the total revenue covered only four-fifths of the current expenditure. Debt for development yields returns to eventually pay it off, but debt for current expenditure only begets more debt. Fiscal and monetary prudence is necessary here, as is the exchange rate policy. Around 70 per cent of the additional debt incurred in the past five years is due to the free-falling rupee.

So, what is Mr Dar up to? Is he bowing to the IMF diktat on stabilisation and gradual revival of growth? Or is he on the same page with the boss to go all out for mega projects and populist schemes, once the IMF stops looking over the shoulder? The former would take a long time if the aim is to place the economy among the top 10 growing countries and the latter, at best, is a gamble, given our status in the international bond market and the state of the domestic bond market, not forgetting the state of security in the region.

Published in The Express Tribune, August 30^th, 2013.

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