Intricate financial balancing in Pakistan

ByAsrar Raouf

Former Civil Servent


August 2, 2022

Asrar Raouf looks at the difficult financial path traversed by the country

It is widely acknowledged that the economic and financial planners of Pakistan are grappling with rising financial liabilities confronting the national exchequer and fast-reducing financial wherewithal available with the country. The more resource constraints the country experiences, the more pressure is exerted upon the financial coffers. The country is now reported to be on the verge of dispensing away with the commercial entities managed by the government and that is now considered one of the last planks the country’s economy can fall back on. Though selling the state enterprises was on the cards for some time yet no government was decisive enough to go ahead in this respect but now the financial compulsions are such that this decision is now probably the only option. It is primarily due to casual handling of the economy that this situation has come to pass but the question remains to be answered whether such disposal would assuredly be able to ward off the financial and economic crisis.

The malaise is very obvious as Pakistan has already taken record foreign loans that have substantially increased the financial liabilities of the state. Only in this year Pakistan has obtained nearly $20 billion that are rated to be up by 27 per cent and this amount was obtained largely to repay the maturing foreign debt and finance imports, as the country faces a serious challenge to keep these financing pipelines open. In this context it was reported that both the former PTI and the current coalition governments received over $19.7 billion in foreign loans during fiscal year 2021-22 from multilateral, bilateral and overseas Pakistanis and this borrowing was $4.2 billion or 27%, higher than the preceding year. The most problematic aspect of the entire issue is that the government side has been unable to achieve the loan disbursement targets, which are largely meant for project financing but required extra efforts.

The loans obtained also include nearly $2 billion in highly expensive foreign loans for the Naya Pakistan Certificates and another $1 billion from the IMF in the last fiscal year. It is pertinent to mention that about 82% of the new gross foreign loans were aimed at bridging the budget deficit and artificially sustaining the foreign currency reserves. The rest of the 18% loans, or $2.5 billion, were taken for development projects and funding a new fighter jet project.The $2 billion loan under the Naya Pakistan Certificates was acquired at 7% interest rate in dollar terms while the return in local currency was up to 11%. Out of the nearly $20 billion, loans of $15 billion had been taken during the time when Imran Khan was the prime minister. Overall, government took gross loans of $57 billion during its 43-month rule. The most difficult aspect of the situation is that until the economy is put on a sustainable path where the economic wheel is not greased by foreign lending, the financial planners do not have a choice but to keep borrowing.

The financial planners were badly stuck by a pause in inflows of major budgetary support loans that has made it difficult to keep the economic wheel moving. In order to maintain the current foreign exchange levels the central bank is monitoring every single financial transaction involving the foreign exchange component but due to the increasing reliance on loans to enhance the foreign currency reserves and finance the budget gap, the cost of debt servicing has gone up significantly. This problem becomes prominent when it is observed that during the last fiscal year, Pakistan received $4.9 billion in foreign commercial loans from banks, including $2.24 billion in June from a consortium of Chinese commercial banks. The problem since then has been aggravated simply because Pakistan’s chances of getting major commercial loans and floating sovereign bonds have gone down after two credit rating agencies changed the country’s outlook to negative while its bonds are trading at a discount on fears of a probable default.

The extremely asphyxiating financial resources situation has compelled the financial managers of the country to avoid the impending economic disruption by resorting to dispose of the assets of the state on an emergency basis. The incumbent dispensation finds itself constrained to bypass procedural and codal formalities while disposing off entities owned by it particularly the six relevant regulations existing in this respect that may prove to become possible hindrance in undertaking this action. In this context, it is reported that the federal government has empowered itself through an ordinance titled Inter-Governmental Commercial Transactions Ordinance 2022 that would facilitate it to give binding instructions to the provincial governments for land acquisition and affairs related to it. To further secure the matter the government has also barred the courts not to entertain any petition against the sale of assets and shares of the government companies to foreign countries.
This situation has arisen mainly due the condition laid down by the IMF that Pakistan’s case for finalising the renewal agreement could not be taken to the board until it arranged $4 billion from friendly countries to bridge the financing gap. The problem reported in this context is that it usually took 471 days to complete one privatisation transaction and that the government had to conclude deals with foreign countries in days to urgently raise funds. However, the urgency of the situation is amply manifest as the UAE had in May refused to give cash deposits due to Islamabad’s inability to return previous loans and instead asked to open its companies for investment, therefore, the federal government intends disposing off stakes in oil and gas companies and government-owned power plants to the UAE to raise $2 billion to $2.5 billion.

As reported the salient features of the ordinance in this respect will provide for a mechanism to carry out a commercial transaction under an inter-governmental framework agreement to promote, attract and encourage foreign states to have economic and business relations with Pakistan. A committee known as the Cabinet Committee on the Inter-Governmental Commercial Transactions will be formed that will have sweeping powers, including those overriding six Acts of parliament. The Inter-governmental framework agreement or G2G agreement means an agreement or memorandum of understanding entered between the federal government and the government of a foreign state that will be expanded to all commercial transactions including sale, purchase, investment, divestment, procurement, licensing, lease, joint ventures, assignments, concessions, services contracts, management contracts or other deals arising out of a G2G or commercial agreement.
In addition, the commercial pact under the G2G agreement will be negotiated and executed between the nominated entities of the federal government and government of the foreign state.The Cabinet Committee on the Inter-Governmental Commercial Transactions will authorise negotiations for a G2G agreement between the federal government and government of a foreign state. It will form a negotiation committee for G2G or commercial agreements, and approve price discovery mechanisms. Despite the exigency of the situation, it is also reported that the ordinance resorted to by the federal government may pop-up many transparency concerns, including the determination of the prices of the shares of the Mari Gas Company, Oil Gas Development Company Limited and Pakistan Petroleum Limited amid their low market price compared with their book values. TW


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