Daily Times

On February 28, Moody’s Investors Service downgraded the Government of Pakistan’s debt obligations ratings from Caa1 to Caa3, which indicated poor standing subject to very high credit risk. That is, if any lending agency is ready to advance money, it is highly likely that Pakistan will not service the loan.

The decision to downgrade the ratings was prompted by Moody’s assessment that “Pakistan’s increasingly fragile liquidity and external position significantly raises default risk to a level consistent with a Caa3 rating.” That is, Pakistan’s avoidance of default would be a near miracle.

Currently, the major challenge to Pakistan sprouts from depleting foreign exchange reserves, which are just around $4 billion, after the commercial loan facility of $1.3 billion ($700 million and $500 million) extended recently by the Industrial and Commercial Bank of China for the rest of this fiscal year. China does not influence its bank to do debt restructuring. The conclusion of the staff-level agreement with the IMF would pave the way for Pakistan’s securing finances from other bilateral and multilateral partners, including the rollover of the $3 billion China SAFE deposits and the rest of the total $3.3 billion refinancing from Chinese commercial banks.

On the loan front, it is apparent that Pakistan is heading for the inclusion of China and the exclusion of the IMF in the long run.

This development shows that the delay in the conclusion of the agreement is compelling Pakistan to sustain its economy through commercial loans available at a comparatively higher interest rate. That is, in order to avoid one crisis, Pakistan is falling into another disaster. Pakistan already owes China a $30 billion loan, including a commercial one. If Pakistan is financially indebted to a single country, it is China. On the loan front, it is apparent that Pakistan is heading for the inclusion of China and the exclusion of the IMF in the long run.

Interestingly, Moody’s goes beyond the financial sphere and asserts that “weak governance and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments.” The statement means that Moody’s sees no respite in Pakistan’s economic woes. The same is the warning Moody’s has issued to any lender. The assertion makes the Pakistanis grapple with two questions: first, what are the reasons for weak governance; second, what are the sources of heightened social risks?

One can find some space shared between weak governance and heightened social risks if a sample of the last decade (2013-2023) is taken into account. Pakistan experienced frequent and protracted sit-ins staged by both political and religious forces, together or one after the other. Protestors themselves discredited Pakistan in the eyes of any foreign investor. The whole episode embodied the hybrid regime experiment, buttressed by the prime intelligence agency. The Pakistanis marred the economic credibility and financial future of Pakistan.

Moody’s also asserted that the “government’s relatively large footprint in the economy would not let the economy be stable.” This point poses a major challenge to the scheme of running the government, which considers privatization detrimental to national security. Furthermore, privatized institutions disappoint the government sector, which has fattened on exceptions and protocols.

In March 2023, the challenge before Pakistan is to reach June, when the Finance Ministry would be announcing the budget for the fiscal year 2023-24. Pakistan wants to complete the ninth review of the IMF’s Extended Fund Facility program. The staff-level agreement would help Pakistan secure finances from other bilateral and multilateral partners.

Moody’s further says that, till the end of the current fiscal year ending June 2023, Pakistan’s external financing needs are around $11 billion including the outstanding $7 billion external debt payments due. The remainder is mainly the current account deficit. It simply means that Pakistan has to service the loan of around $2 billion a month. This point is further validated by Moody’s assessment that “Pakistan’s external financing needs for the fiscal year 2023-24 are around $35-36 billion. Pakistan has about $25-26 billion worth of external debt repayments (including interest payments).” The average is the same: Pakistan has to service a loan of around $2 billion a month. The state of affairs would continue for the next five years. The question is this: where from can Pakistan get $2 billion a month to keep on servicing loans – initially till the end of June 2023 and then for the next five years?

In addition, Pakistan’s current account deficit is around $10 billion a year. The IMF has advised Pakistan to keep its foreign exchange reserves of more than $12 billion. This is an added challenge: How to reduce the current account deficit and how to secure the target of foreign exchange reserves? Any attempt to reduce the current account would reduce imports, which would decrease economic growth, thereby shrinking the size of the economy. The double whammy is that, in the presence of the current account deficit, Pakistan cannot increase its foreign exchange reserves. That is, even if Pakistan avoids default by June 2023, the threat of default would continue looming large over Pakistan in 2023-24.

On March 6, with the IMF, Pakistan is attending its meeting by making four main claims: first, it has increased indirect taxes on the asked items, sanctified through a mini-budget and tax circulars; second, it has increased the interest rate on borrowing to the asked level of twenty per cent; third, it has decided to adopt austerity measures to reduce expenditures in both civil and military domains at least fifteen per cent; and fourth, it has consolidated the defence account. Nevertheless, predictably, Pakistan’s pledges to adopt austerity measures hold no credence before the IMF.

Solutions rest with Pakistan are five: first, keep on raising taxes (direct and indirect) to generate more income; second, keep on reducing non-developmental expenditures including defence expenses to spare money for deficit financing; third, secure export quotas to increase foreign exchange reserves; fourth, resort to liberal privatization to earn cash for debt servicing; and fifth, lease some land to China to reduce the extraordinary cumbrous loan. In the last solution, Pakistan’s destiny seems to be lying.

The writer can be reached at qaisarrashid @yahoo.com.