Many angles of solution to current financial crunch

ByAsrar Raouf

Former Civil Servent


July 28, 2022

Many angles of solution

Asrar Raouf talks about Many angles of solution issues faced by Pakistan’s economy

Many angles of solution in Pakistan are in the grip of a classic crisis as the economic crunch faced by the country is exacerbated by the intensity of the political uncertainty. The country is now confronted with multiplicity of views expressed by government sources, economists and financial analysts that are often in conflict with each further complicating the socio-economic scenario. One thing is however certain that no one is quite sure about the future direction of the economic life and how much pain is in store for the people to endure. It is widely acknowledged that the last four years have proved to be the worst period of economic difficulties experienced by the country and unfortunately there is no end in sight. It is earnestly expected that the political forces will ultimately realise the precarious nature of the economic situation and would join together to get the country out of this mess, and, of course, the sooner the better.

The first problem to counter is to bridge a $4 billion financing gap that is staring the financial managers in the face. It was reported that against the $35.1 billion gross financing requirement for the current fiscal year, there is still a gap of $4 billion that will be required to be bridged and this gap is quite difficult to bridge keeping in view the precarious position of the finances of country. The reports are that this gap may be bridged by selling stakes of listed government companies to a friendly country, buying oil and gas on deferred payments and arranging cash deposits. It must however be kept in view that this is an oft-repeated solution that has hardly seen fruition and this has become a staple for successive governments to suggest in moments of financial crisis without having much faith in it.

It is pointed out also that the renewal of IMF programme may open the doors for receiving financial assistance from friendly countries but this prospect is in the air for quite some time and may not materialise in toto. The problem moreover is that such temporarily financial bailouts have never proved satisfactory as evidently this path has also been repeatedly taken but with quite hopeless results. The reluctance of friendly countries in bailing out repeatedly is now very evident as is borne out by the reports that all countries had taken a stance that Pakistan should first enter into an IMF programme before getting any kind of financial assistance. The clear purpose of taking this course of action is that these countries are deeply concerned that the Pakistani state machinery will quickly go off the track and revert to its pattern of avoiding fiscal discipline. The most disturbing aspect reported about this eventuality is that, in case, Pakistan goes off the mark, the lifeline will be cut.

In this context reports are doing rounds that the United Arab Emirates had refused to give cash to Pakistan and instead asked to sell shares along with one board seat of the companies whose share the gulf country would buy. The size of the UAE investment will depend upon the number of companies that Pakistan will offer to it for buying their shares. The hitch here is that the existing privatisation law does not permit government-to-government commercial contracts and to enable the transaction with the friendly country a new law will be enacted that could be a long-drawn process and in wake of the current political uncertainty it may further complicate matters.

It is also reported that Pakistan also hopes that Qatar would increase the LNG import cargo from existing three to at least four a month in addition to giving gas on deferred payments and the groundwork was done last month. It is also pointed out that Saudi Arabia that has already given $1.2 billion equal annual oil on deferred payments facility will raise it to $2.4 billion. It was also mentioned that hopes are entertained about the IMF deal that would also unlock $3.5 billion more loans from the Asian Development Bank, $2.5 billion from the World Bank and $500 million from the Asian Infrastructure Investment Bank (AIIB). It was also reported that the overall primary budget surplus target stands at Rs.153 billion or equal to 0.2% of the GDP along with IMF mentioning the underlying primary surplus target at 0.4% but also gave a fiscal adjuster equal to Rs.180 billion to clear payments of the Independent Power Producers.

The pressure on the government is on to substantially increase its tax revenues despite reluctance exhibited by the FBR that it cannot go up a certain threshold but the international donors are insisting on undertaking this task as they often point to the vast undocumented economy existing in Pakistan that gives the impression that there are plenty of avenues that are required to be explored and that they are certain that more revenue could be realised. The government is apparently committed to achieving and, probably, exceeding Rs.7.470 trillion tax collection target and also collect another Rs.855 billion on account of petroleum levy to achieve the overall primary budget surplus target agreed with the IMF.

Most of the measures planned by economic managers to carve out a solution to the economic difficulties are definitely dependent upon the future and performance of the economy. By the looks of it this expectation looks in trouble as rating agency Fitch revised its outlook on Pakistan to negative from stable, citing a deterioration in the country’s external liquidity position and financing conditions as well as the risks from renewed political volatility. The rating agency must have taken into account the consistent fall of Pakistani rupee against US dollar and has already crossed Rs.225 and its reportedly heading towards falling further. The rupee is especially under pressure from the falling reserves and delay in foreign inflows from the IMF and other sources.

Similarly, the Pakistan Stock Exchange Ltd KSE100 Index fell 978 points or -2.36% to close at 40,389.07 level. The stock market was hit by dual difficulties: financial crunch and political instability and accordingly reacted to both leaving little chance of improvement in its performance. Foreign exchange reserves have fallen to as low as $9.8 billion, hardly enough to pay for 45 days of imports. In this context Fitch added the political volatility could undermine the fiscal and external adjustment, especially in the environment of slowing economic growth and high inflation, which stood at 21.3% in June. State Bank of Pakistan (SBP) has already pushed policy interest rates to 15%. It forecasts gross domestic product growth in the 2022-23 financial year between 3% and 4%, less than the government’s budget estimate of 5%.

Further making the situation harder is that the IMF had estimated Rs.850 billion increase in the flow of circular debt in the power sector, although the government’s calculation showed the increase at Rs.280 billion. Despite the difference and discrepancy in these figures it is reported that still the total circular debt is over Rs.2.5 trillion that is simply not acceptable to the IMF and it is insisting that it should be controlled. These difficulties are indeed enormous and nerve-wracking yet they have to be dealt with despite political advantage or economic association. TW


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