July 10, 2023 (MLN): IMF's Staff Level Agreement (SLA) with Pakistan is bringing positivity already. The delayed negotiations – coupled with political uncertainty – had derailed the path to stability, let alone growth. Nevertheless, tough actions are bearing fruit. Don't get excited, we need to do much better.
For those overly jubilant – beating your author's optimism – CCC is still ranked 17/18. Long way to go. Bangladesh ranks 13/18, by the way.
The very Fitch kept Pakistan at "B" 2015 in September 2015. That is three notches up from today. We have just avoided falling into the pit after slipping from the mountain peak. There is a lot of restructuring needed to correct the course and climb up the ladder. Creditworthiness is a prized status that makes growth easier.
Critical aspects highlighted by the credit agencies are;
1- Political uncertainty
2- Import restrictions
3- Energy subsidies
4- Off-tracking IMF's reforms
5- $4B FY24 Current Account Deficit
6- Imports financed by non-SBP FX $
7- Imran Khan's popularity adds uncertainty
8- FY 24 Fiscal & Primary Deficit at 7.6% & 0.1%
9- Government Debt/GDP of 74%
10- Debt/Revenue of 600%
11- Interest/Revenue of 60%
12- Paris Club debt restructuring delayed
13- Private external credits could get affected
Simply put, investors and lenders have now relatively better comfort over credit worthiness of Pakistan after unlocking IMF's program. Saudi, UAE & Chinese flow along with ADB, WB, AIIB & IDB would help rebuild FX reserves. Currency stability and convergence of interbank and open market rates should eventually add remittances back and ward off speculators.
One condition of all the lenders is to remove import restrictions. The backlog of payments would need to be paid by commercial banks, not from SBP's reserves.
Finally, some sense is coming back of seeing SBP FX reserves fall from USD 20B to USD 4B. It should be criminalized to let the hard-earned (borrowed?) dollars be wasted to pay for imports and defend the rupee.
Markets are also rejoicing. Pakistan's global bonds are one of the best-performing asset classes this month. The yields have improved drastically but are a far cry from appealing single-digit yields. It's time for bulls to welcome Pakistan back into global debt markets and bet on reforms again.
With higher global interest rates – and poor recent performance – tapping the bond market is off the cards for a while until another 3-4 year program is signed by the new government. I still rest my case to continue borrowing from overseas Pakistanis for projects such as Railway ML 1 which add 10-15% IRR to the economy.
Until then, keep focusing on growing exports, curtailing expenditures, widening the tax base, growing FX reserves, attracting foreign investment, and most importantly, hiring the right man for the right job.
We need the best of the best to govern Pakistan. Pay them USD 1M/year if needed to bring Pakistan back to investment grade in 4 years. No more complacency, every month matters. Every dollar counts.
The author is an independent economic analyst and writes at Twitter and Linkedin.
Posted on: 2023-07-10T23:01:01+05:00
