The Khan administration has tabled two controversial bills in the two houses of parliament – 343 billion rupees money bill though its passage was required by a majority only in the lower house and the State Bank of Pakistan (SBP) amendment bill that envisages its autonomy – prior conditions imposed by the International Monetary Fund (IMF) and agreed on 24 November 2021 by the country’s economic team leaders – Shaukat Tarin, appointed Minister of Finance on 16 April 2021 and Dr Reza Baqir, Governor State Bank of Pakistan appointed on 6 May 2019.
The economic team leaders’ objective in supporting these bills is two-fold. First, while the sixth tranche release of 1 one billion dollars by itself may not be tempting enough to seek the passage of these two politically extremely challenging bills however approval by the Board of Directors of the IMF to disburse this amount is believed to be critical to providing a comfort level to other multilaterals/bilaterals to continue programme assistance (budget support) that the Pakistan government will adhere/not reverse its pledged reform agenda, as opposed to project- specific support that requires meeting sector specific conditions.
The budget announced by Tarin for the current year envisaged 2693 billion rupees as external loans with only 259.9 billion rupees earmarked for project assistance. Given that the rupee-dollar parity taken for the budget was 152 rupees to the dollar this translates into 17.7 billion dollars with project assistance accounting for only 1.7 billion dollars.
On Friday past the rupee-dollar interbank rate was a little over 176 rupees to the dollar which implies that total external resources in rupee terms would be 3115 billion rupees with project assistance accounting for 457.4 billion rupees. Be that as it may, it is relevant to note that by however much the rupee declines subsequent to the IMF tranche release the benchmark would be 152 rupees to the dollar – the rate used in the budget.
The Khan administration has claimed since it took over power that the bulk of this borrowing is sourced to the profligacy of previous administrations and that it merely procured external loans to pay off previous loans and stave off the possibility of a default with all its serious consequent implications on the economy.
This narrative can be challenged as data reveals the following: by end-June 2018 total external debt was 95.237 billion dollars, raised from 44.4 billion dollars in 2012-13 attributable to Ishaq Dar’s policy to borrow externally at interest of around 8 percent while domestic borrowing rate was around 12 percent – a patently flawed policy requiring an artificially overvalued rupee to enable him to balance his accounts which in turn left the country hostage to external pressure.
By 31 December 2021 external debt had risen to 130 billion dollars — a rise projected in the ongoing 6 billion dollars IMF Extended Fund Facility programme wherein the then economic team leaders — Dr Hafeez Sheikh and Dr Reza Baqir — stipulated that the country would require 38.6 billion dollars external financing during then thirty-nine month programme period (scheduled to end September 2022).
Data released by the SBP and the government reveals 42.748 billion dollars was borrowed from August 2018 to December 2021 with 32.748 billion repaid during this time with net borrowing of over 10 billion dollars. What is disturbing and requires immediate remedial measures is that the Khan administration has contributed to this enhanced reliance on external borrowing by: (i) raising current expenditure from around 4.298 trillion rupees in 2017-18, the PML-N government’s tenure ended 30 April 2018, to a whopping 7.5 trillion rupees today – an unprecedented rise of 74.4 percent in less than three years. This rise is understated by more than 1.2 trillion rupees as the debt servicing and principal as and when due has not been budgeted for the past two years due to the debt relief initiative of the G-7 to enable debtor governments to deal with the Covid-19 threat.
And while Prime Minister Imran Khan remains focused on sale of cars/buffaloes and reducing Prime Minister House’s expenditure on tea and biscuits yet these savings do not account for even half a percentage point of total current expenditure; (ii) political support for Sheikh/Baqir’s 2019 proposal to convert short-term debt to long term-debt (a conversion at a time when the discount rate was raised to 13.25 percent – a decision that has raised the country’s interest payments) must be desisted in future with the discount rate at a high of 9.75 percent today; (iii) reliance on commercial loans, at a high rate of return with a low amortization period, rose from 1.995 billion dollars in 2017-18 to 4.5 billion dollars by the end of calendar year 2021 – a rise of 126 percent; and (iv) heavy reliance on debt to strengthen the foreign exchange reserves which accounts for over 50 percent of present day reserves including swap arrangements, issuance of sukuk/eurobonds at rates well above the global average.
Secondly, Pakistan’s leverage with external lenders is fast eroding as the country remains hostage to not only being pushed into the black list by the Financial Action Task Force (as alienation from key Western member countries continues particularly the US and France) but also from friendly countries with China insurance unwilling to extend support to projects in Pakistan under the CPEC umbrella for failure to meet our contractual obligations and Saudi Arabia’s loan conditions for parking 3 billion dollars for one year in the SBP at terms even more challenging than the rates on offer by several commercial lenders.
Conspiracy theorists argue that the appalling state of the economy today has made Pakistan the weakest nuclear state in the world reflected by its lack of leverage in terms of accepting harsh upfront conditions by multilaterals and sustained failure to get out of the grey list by the Financial Action Task Force, be it due to Indian influence or due to strained relations with the US and France in recent years.
The IMF’s reluctance to scale down the harsh prior conditions may therefore be due to: (i) Pakistan’s previous track record in not implementing structural reforms and, on the rare occasions when they were implemented, they were unsuccessful as in the case of K-Electric privatization and/or unbundling the Wapda network as contractual obligations remained unmet and non-economic factors continued to prevailed over national economic considerations, or reversed after programme suspension/end for political reasons; and (ii) major donor countries no longer support Pakistan’s attempt to phase out harsh across the board conditions.
Be that as it may, reports indicate that the IMF refused to entertain the government’s proposal to legislate through ordinance as opposed to tabling these two bills in parliament. The Fund’s objective may have been to get an across the board political consensus in light of the PTI being a minority government.
However, if this was the Fund’s objective then it badly miscalculated because the two bills are likely to be used by coalition partners as bargaining chips that may be linked to higher expenditure than already budgeted; in addition, the bills have been extremely divisive not only within the country’s entire political spectrum but reports indicate that the State Bank bill has divided the cabinet as well, with the Prime Minister’s office expressing concerns with some of its clauses.
To conclude, Pakistan is between the devil and the deep blue sea and the Prime Minister’s insistence that all is well is disturbing if it is a reflection of his understanding of the actual state of the economy; but if it reflects a deliberate attempt to allay growing concerns then he needs to direct his economic team to stop pumping borrowed money into the economy – be it to fund rising government expenditure, or be it for interest free credit to the poor.
