Pakistan’s economic options are all tough, but not choosing increases the costs of all
The role of the Finance Ministry requires making judgments, weighed by information and economic fundamentals, and translating these into appropriate policy actions. Research and experiences should shape such views for achieving economic and financial stability with the overarching objective of maintaining the welfare of the general public, at the very least. An uncertain environment and political considerations undoubtedly add to the complexity of decision making but there can be few graver missteps than being rigidly fixated on certain ideas. Policymakers must instead demonstrate humility and be prepared to exhibit flexibility when faced with compelling circumstances that require the adoption of a course of action to reflect that. Finance Minister Ishaq Dar and Q-Block’s approach to date suggests a scarcity of those qualities.
Despite the State Bank of Pakistan’s foreign exchange reserves depleting to $4.3bn as of January 6, or less than the value of a month’s imports, Dar remains hooked on the idea of pegging the value of the currency. Meanwhile, the government is preoccupied with political machinations around the dissolution of Punjab and Khyber Pakhtunkhwa provincial assemblies and elections that are to be held within the next 90 days. The economic carnage gets worse with auto assemblers, pharmaceuticals, textile exporters, and myriads of other large and small businesses facing partial or complete closure. Inflation which is already over 24.5 percent shows no signs of abating and essentials like medical supplies are running short. The latest Pakistan Bureau of Statistics suggests that inflationary pressures are building steam. This time around, it is being driven less by the global commodity super cycle, and more by supply chain bottlenecks partly as a result of the artificial peg of the currency and resultant shortage of foreign exchange to procure inputs for production.
The successful completion of the 9th review of the IMF program is urgently required to release the next tranche of almost USD 1.1bn as well as assistance from friendly countries. As was made clear by the Saudi Finance Minister, Mohammed al-Jadaan, at the World Economic Forum in Davos, future support by the kingdom will be contingent on being aligned with the multilateral agencies and implementation of appropriate fiscal and investment reforms. These considerations are likely to hold for other traditionally friendly countries also. The onus of credible reforms to bring about sustainable macroeconomic stability lies firmly with the policymakers.
While the Prime Minister and Finance Minister often repeat their intention to fulfill the commitments, they have so far balked from taking demonstrable actions to ensure the completion of the IMF review.
However, the government is hesitating from taking necessary action to meet commitments made to the IMF aimed at bringing about exactly such reforms. While the Prime Minister and Finance Minister often repeat their intention to fulfill the commitments, they have so far balked from taking demonstrable actions to ensure the completion of the review. This could be because it would further erode the ruling coalition’s political capital at a time when provincial assembly elections are to be held within the next three months and national assembly general elections by autumn.
The delay in doing the needful increases the likelihood of a disorderly default over the next 6 to 12 months. At a time when Pakistan’s access to international credit markets is effectively cut off, policymakers should ideally let the exchange rate adjust and increase policy rates to reduce consumption and generate the required savings to service the external debt. Alternatively, as the think-tank, Economic Advisory Group and other independent economists have suggested, “Policymakers can choose to approach creditors and initiate a debt restructuring process. This will again come at the expense of meeting additional conditionalities agreed upon with the creditors, who will bear the cost of restructuring”.
Debt restructuring will involve an exchange of old claims for new claims, where the new obligations have different characteristics. It could be a mix of lower principal values by taking haircuts, lowering coupons, and/or reprofiling for longer maturity. The eventual composition will depend on what the creditors agree to. The debt sustainability analysis (DSA) is likely to be carried out by advisers mutually agreed upon between the government and the lead creditors and include the IMF. To get broad creditor participation and reduce the likelihood of holdouts, the process of restructuring has to be perceived as fair and transparent. It will also require structural reforms that try to embed fiscal discipline going forward. The final negotiations to get an agreement with the creditors are arduous and time-consuming. The goal of successful reprofiling and if required principal haircuts would be to increase debt repayment capacity and access to capital markets so that investments may resume and growth gradually picks up.
There should be no illusion that debt restructuring comes without considerable economic pain. It is likely to require deeper and more extensive structural reforms than the current IMF program and result in low economic growth near to mid-term. None of the choices the country faces are easy, but not choosing any increases the costs of all.
— Javed Hassan is an investment banker who has worked in London, Hong Kong, and Karachi. He tweets as @javedhassan. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Arab News.