June 16, 2023 (MLN): Unfortunately, the country is at the stage where this troubling question arises in the face of the crucial treatment that is devoid, yet needed to salvage Pakistan’s financial well-being.

Grappling with a plethora of challenges, Pakistan finds itself caught in a web of economic distress, and political chaos over the years, and the situation is only getting nastiest with no light at the end of the tunnel, at least for now.

Mighty politicians, the owners of big fat businesses take the helm of the country, putting forth Pakistan’s welfare and progress as their sole aim ended up in the blame game with no essential decisions to save the sinking ship.

Since friends and financial institutions have been closely watching all the drama, there is hesitation regarding coming to the rescue on the horizon.

Surrounded by all the negativity and with shrinking means to live a decent lifestyle, the country is losing its precious gems as most of the youth have flown away from the country in search of better opportunities.

The IMF Conundrum:

In a bold move to secure its vote bank and political mileage, the government offended the International Monetary Fund (IMF) at various points, Jeopardizing the already flimsy relationship.

Earlier, former Prime Minister Mr. Imran Khan announced a significant energy subsidy just to make a soft corner while remaining in the IMF program right after a political campaign started against him.

After the ouster of Imran Khan, the former Finance Minister Miftah Ismail, from the PDM-led government, caused a prolonged delay in making much-needed difficult decisions. The prolonged delay was merely intended to provide temporary respite to the general public.

Later, Ishaq Dar took over the reins of the economy as the finance minister, but he too hesitated to make difficult decisions while complying with IMF’s conditions to secure a bailout package.

At the same time, being a last resort, the IMF’s lack of flexibility in negotiations which led to the longer-than-expected delay in much-needed tranche has further compounded the nation’s economic woes.

 IMF has raised serious concerns over the draft budget for FY24 saying that it has missed an opportunity to broaden the tax base in a more progressive way. 

“The new tax amnesty runs against the program’s conditionality and governance agenda and creates a damaging precedent,” Esther Perez Ruiz, the IMF’s resident representative for Pakistan said on Thursday. 

Later on the same day, Moody’s indicated that budget FY24 lacks major revenue-raising and spending-containment measures to alleviate intense government liquidity pressures.

This impasse has left Pakistan with limited options and a dire need for sustainable solutions.

Mr. Dar’s Off-the-Cuff Remarks:

Adding fuel to the fire, the remarks made by Ishaq Dar, regarding the IMF have only deepened the rift.

“On IMF instructions we cannot take more harsh decisions.” This has become a repetitive statement of Mr. Dar.

In response to the IMF’s remarks on the draft budget for FY24, he termed the IMF’s attitude “Non-Professional” and refused to take the fund’s advice on the issue of giving tax exemptions.

He also claimed that the foreign powers want Pakistan to default like Sri Lanka and then enter negotiations.

His blatant comments came at a time when the country’s foreign exchange reserves are rapidly depleting, leaving the IMF bailout package as the only feasible option to ease the crisis.

His repetitive declaration that the government will not take more harsh decisions has distanced Pakistan from securing much-needed economic support.

The loan program has already been in limbo for a longer than expected period and his comment “We cannot take further ruling,” has potentially hammered the final nail into the coffin of the tense relationship with the IMF.

Such remarks imitate a lack of understanding of the gravity of the situation, which further erodes international confidence in the country’s ability to address its economic challenges.

Interestingly, he is still optimistic that the country can miraculously unlock the deal by the end of June 2023.

“The 9th review of the IMF program will be completed this month as our talks with the IMF have not concluded yet. Thus, in my view IMF program has not ended yet,” he said on Thursday.

Nearing Default or Debt Restructuring?

The government has once again found itself in a difficult spot either to go for debt restructuring or announced default. Obviously, the latter one is quite painful to opt so there is a high likelihood that government would go for debt restructuring.

The recent press discussions and statements by Ishaq Dar reflect that Pakistan is on the brink of default as the Minister started talking about debt restructuring. Thus, the country is considering external debt reprofiling of bilateral debt.

The analyst fraternity is of the view that timely and orderly debt restructuring is the need of time as the situation of debt repayment is not fully under control.

If Pakistan delays the negotiation process of debt restructuring or reprofiling at a time when the IMF review is getting pushed back, then the consequences will be very painful.

At present, the total external public debt is $96bn or 28% of GDP as of March 2023 while the external debt and liabilities are at $126bn.

Multilateral debt owed to International Financial Institutions accounted for the bulk at 46% or $45bn out of $96bn.

Bilateral debt is currently at $38bn or 39% of which Paris Club is $9bn and Non-Paris Club is $29bn. On the other hand, Commercial Debt has fallen close to $6bn while Bonds and Sukuks are $8bn constituting only 15% of total external debt.

China’s lending to Pakistan stands between $25-30bn including bilateral loans and commercial loans through Chinese institutions. Similarly, Saudi Arabia has provided Pakistan with an estimated amount of $5-10bn. In the next 12 months, Pakistan has to pay $23bn. The net amount payable after the expected rollover is $9-11bn in FY24.

Political Instability: A Toxic Legacy:

Pakistan’s political landscape has long been plagued by uncertainty, hindering any meaningful progress. In spite of the chorus of promises for the country’s prosperity, the political parties have failed to rise above their own vested interests.

The constant power struggles, corruption scandals, and lack of accord have created an environment that suffocates growth and dampens potential investors.

Unfortunately, the leaders of the political parties have failed to prioritize national interests over personal mileage in the absence of a stable and accountable political system.

The Elusive Support of Friendly Nations:

This political drama for power has left the friendly nations, once willing to provide support with no choice but to remain hesitant while coming forward to rescue Pakistan.

The hesitancy further stems from concerns over the effectiveness of previous aid and the country’s ability to address underlying structural issues.

Pakistan needs to rebuild trust and prove its commitment to meaningful change if it hopes to rekindle support from its allies. But again, it’s a long-term process and a political party whose motive is to survive only for five years tenor will not do the deed.

The Haunting Brain Drain:

The economic breakdown has activated a mass exodus of talented individuals seeking better opportunities abroad. Hundreds of thousands of Pakistanis have left the country in recent months, aggravating the brain drain phenomenon.

This departure not only drains the country of its skilled workforce but also hinders prospects for growth.

What is the solution to getting out of this throbbing situation?

It is important to note that the temporary inflows can offer some respite but they are no substitute for sustainable economic reforms and a robust governance framework.

In simple words, our imports are higher than exports meaning the inflows of dollars are lesser than the outflows of dollars. The country needs more dollars to pay the import bill. Hence, ending up borrowing loans.

The only solution to ditch this situation is to establish a number of export-led and import-substitution industries to increase exports and reduce reliance on imports.

However, the question remains: which political party (leadership) will step up for this reform, knowing that it would obviously take more than a so-called political “five-year tenure”?

Seeking money from here and there, compromising the country’s self-respect may be easier than embarking on the challenging process of establishing industries.

Way Forward If IMF Won’t Come to Rescue at Last Moment:

• The present government should implement a dollar amnesty program, allowing Pakistani citizens to deposit their undocumented dollars in local foreign currency accounts
• Restructure foreign debt by negotiating haircuts and extending the repayment period to lessen the burden
• In order to stimulate economic growth, the interest rates should be reduced
• Offer T-bills directly to the public as per which individuals will be able to invest in T-bills directly
• Opting for demonetization of high-denomination currency notes
• Implement measures to reduce import bill
• Increase the tax base immediately, targeting the real estate, retail, wholesale, and agricultural sectors

Copyright Mettis Link News

Posted on: 2023-06-16T15:56:22+05:00