Is there a way to lighten the work of the economy? – Editorials
EDITORIAL: The Ministry of Finance is unsure where to allocate the necessary resources to finance the tariff subsidy of Rs 19.99 per unit of electricity for the five export-oriented sectors announced by Finance Minister Ishaq Dar on October 6 , as well as for the backlog subsidy amounting to a considerable total of Rs 144 billion.
A day later, Moody’s downgraded Pakistan’s credit rating to Caa1 from B3, which was challenged by the finance minister who said that “they [Moody’s officials] must meet me. I told them if you don’t [reverse] that, I will give you an appropriate answer at our next meeting.
On the same day, the Department of Finance issued a terse statement stating that “the Department of Finance strongly disagrees with Moody’s unilateral rating action as no prior consultation/meeting has taken place as required. Pakistan is currently under the IMF program, the continuity of which rests on confirmation and confidence in the country’s ability to maintain fiscal discipline, debt sustainability and its ability to pay all its internal and external debts. .
It is unclear if there was a meeting between Finance Ministry officials and the Moody’s team during the IMF/World Bank annual meeting in Washington DC (October 10-16); however, the notation remains unchanged; two weeks later, on October 21, Fitch also downgraded Pakistan’s rating from B- to CCC+, although so far neither the finance minister nor the finance ministry has commented on the downgrade.
The four reasons for Fitch’s downgrade are: (i) the fall in reserves which represent less than a month and a half of imports to $7.87 billion – reserves to be bolstered by renewal pledges and borrowing with friendly countries, in particular Saudi Arabia, the United Arab Emirates and China. Commitment according to IMF documents was made directly to the Fund, indicating the need to meet IMF conditions, before and after all remaining quarterly reviews.
Since the disbursement of the IMF tranche in early September, following the success of the seventh/eighth reviews, there has been no inflow of foreign capital from friendly countries, raising concerns about the ability to meet the costs of external debt service, although the World Bank announced the reallocation of existing commitments for flood relief and last week the Asian Development Bank approved a $1.5 billion loan for Pakistan ; (ii) fiscal tightening, higher interest rates and measures to limit energy consumption and imports – policies supported under the IMF program, although not fully implemented at present – would reduce the current account deficit despite reduced exports and the higher import requirements that would result from the floods.
However, with international oil prices expected to rise next month following OPEC+’s decision to cut productivity, this may be short-lived; and (iii) Pakistan’s external public debt maturities for the current year exceed $21 billion, mainly to bilateral and multilateral creditors, which mitigates refinancing risks, and there are already agreements to refinance some of them ; and (iv) Fitch writes that “the downgrade reflects our view of heightened policy risks that could undermine the IMF program and official financial support for Pakistan”.
The Prime Minister and his team, including the Minister of Finance, are currently in Saudi Arabia, presumably to seek the disbursement of the promised amount and ideally to obtain additional funding or, in other words, the policy remains the same: meet payment obligations by borrowing .
Thus, the visible burden remains on the government’s ability to borrow at cost (multilateral/bilateral/commercial banks/debt issuance) or reschedule/defer loans. Ideally, this approach should be accompanied by undertaking reforms and reviewing the usual budgeted expenditures and resources.
It is therefore essential that the Ministry of Finance recognize that three finance ministers, including the incumbent, asserted optimistically, albeit incorrectly, at the start of their appointments that they would be able to convince the Fund to phase out difficult initial conditions based on their previous interactions with the Fund; however, all three have failed to realize that persistent poor governance has led to a state of the economy that no longer allows any concessions from the Fund – a state that all three men were committed to in their previous terms.
Today, what is needed is off the beaten track thinking not only about the implementation of politically difficult policy measures for the electricity and tax sectors, but also for public entities that represent a budget of ‘one trillion rupees each year as well as the end of the elite capture the country’s scarce resources through sustained fiscal and monetary incentives.
Copyright Business Recorder, 2022