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Thursday December 08, 2022

The centre cannot hold

By I Hussain
October 23, 2022

It is plain that the finance minister’s visit to Washington has not resulted in any financial relief since, apart from expressions of sympathy for the devastating floods, no commitments have been made by the multilateral agencies for any further funding. An announcement has been made that some of the loan amounts already committed will be released earlier than programmed but that’s about all.

Mr. Dar’s US trip was intended to apprise the international financial community about the scale of the flood devastation and get some respite against harsh austerity measures as well as to urge the lending agencies to reschedule the short-term repayments due this year in view of the economic crisis the country is going through.

But there were some missteps even before the visit. For instance, by not increasing the Petroleum Development Levy, a move deemed ‘reckless’ by even the party’s previous finance minister, Miftah Ismail, the IMF and other international agencies may have had doubts about the government’s sincerity and capacity to see the IMF programme through to its conclusion.

Mr Dar was peeved with Moody’s for the ratings downgrade on Pakistan’s bonds but the bond market has the power to bring governments into line as the UK’s prime minister and its former finance minister have found to their discomfiture only last week.

Moody’s was just following market signals which showed yields on Pakistan’s 10- year Eurobonds as high as 27 per cent earlier this month – an indication by investors that Pakistan was heading for default.

Moody’s would have been negligent in its professional duties if they hadn’t downgraded Pakistan’s bonds, having already been pilloried by regulators and investors after the 2008 recession for misleading bond buyers because of its egregiously flawed ratings of asset-backed securities at that time. Many of these were given the highest triple-A ratings for safety and soundness but were actually nothing more than bundles of layered subprime mortgages that proved worthless when the housing market in the US cratered resulting in losses of billions to investors.

The whole rationale for issuing bonds by Pakistan that we heard about first in the Shaukat Aziz years and then during Ishaq Dar’s previous tenure has come unstuck. Then we were told that, although we really didn’t need the foreign exchange through the issuance of bonds, the benefit would be that international credit rating agencies would give Pakistan’s bonds an investment grade rating that would enable us to access international capital markets more frequently. The irony is that now that we need the funding we don’t have any willing commercial lenders.

The route to rescheduling loan repayments leads through Beijing. Look at it from a member of the Paris consortium of lenders’ point of view: they would want an assurance that any cash flow savings derived from concessions on their multilateral and bilateral loans are not passed on to China as timely repayment on the latter’s loans. Instead they would insist that Pakistan gets an agreement from Chinese lenders so that if a ‘haircut’ is acceptable to the lenders then it should be administered in lockstep.

In effect, there is a default in the works even though it may only be one in a technical sense. And yes it’s also a ‘haircut’ despite Mr Dar’s refusal to accept the barbershop metaphor. Because if repayments are pushed into the future, as they would be under a rescheduling agreement, the present value of the liability to the borrower is reduced and the lender takes a hit. At least that’s what they teach in Finance 101 when professors talk about the concept of the ‘time value of money’.

For those not versed in finance theory, this states that a guaranteed amount of money received immediately is worth more than the same amount of money guaranteed to be received some time later because the money received now can be put to work earning interest in a world where interest rates are positive and there is no inflation.

For example, Rs100 received today grows into Rs105 after one year when deposited in a bank paying five per cent interest. This is preferable to the alternative of receiving only Rs100 in a year’s time. (Finance professors must have been scratching their heads in bewilderment to explain to students how this key financial concept works in the topsy-turvy world of negative interest rates which was the case in several European countries as recently as a year or so ago).

It will require some convincing to get Beijing to agree to rescheduling loans since they have already expressed concerns about the delays in the China-Pak Economic Corridor (CPEC) project implementation; moreover they must be deeply upset that Pakistan hasn’t been able to apprehend any of the perpetrators involved in the killing of Chinese citizens. So the help of ‘neutrals’ in these negotiations would be essential especially since the present government after its string of by-election losses has more holes in its credibility than there are in a slice of Swiss cheese.

In the current circumstances there is also a dire need to economize on government expenditure. What is the need for a cabinet of 70 members at the centre when governance across-the-board is shoddy, law and order is non-existent, and Pakistan is pleading for concessions from international lenders?

As an aside, the whole business of appointing special assistants to the ministers needs to be reformed. Cronies and friends are not entitled a ‘share’ (in the word of the leaked audio from the PM Office about the demands of one of the members of the coalition in seeking appointments for their party members) of high level advisory jobs as if this is booty to be divvied up. As taxpayers bear the expense of these jobs there should be some accountability as to what special advisers are expected to achieve during their tenure.

In my opinion, it would be preferable that all special assistant positions whether in the PM Office or with a cabinet member be advertised with applications invited from all Pakistani nationals. The Federal Public Service Commission should be entrusted to conduct the recruitment and selection procedure and to appoint suitable candidates for a term of, say, three years.

There are at least two advantages of open competition for these advisory positions: (1) a broader range of expertise including from the private sector could be availed by the concerned ministries and departments; (2) specialist advisers could bring a non-partisan perspective to issues instead of being part of an echo chamber where the only opinion that matters is that of the party’s leader.

The federal government has nothing to offer the country except austerity. The problem is that you can’t grow an economy through austerity so their prospects for the next general election are grim, especially since the general election should under the rules laid down by the constitution be held within the next calendar year – hardly enough time to turn the economy around despite Mr Dar’s sunny optimism.

Shehbaz Sharif’s government is holding out against the call by the opposition for announcing a general election immediately, despite bruising defeats suffered by the ruling party in the recent by-elections at both the national and provincial levels. One plausible reason is an important appointment next month so that the cards, if not stacked in their favour, are at least not stacked against them like the last time around. But the price of delay could be a landslide electoral defeat.

The writer is a group director at the Jang Group. He can be reached at: iqbal.hussain@janggroup. com.pk

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