Friends to the rescue

Pakistan’s iron brother China and fast friend Saudi Arabia are riding to the rescue of our beleaguered economy yet again with a sheaf of lifelines that aggregate to around $13 billion. This is a welcome development, especially because it comes at a time when sundry revenue shortfalls and expenditure overruns are pushing the government’s budget for the current fiscal to a breaking point. China has agreed to roll over $4 billion in sovereign debt and to refinance some $3.3 billion in commercial loans from Chinese banks. In addition, Beijing has promised to hoist the bilateral currency swap by the equivalent of between $1.2 billion and $1.4 billion, bringing the total of Chinese financial assistance to around $8.7 billion. The Kingdom of Saudi Arabia on its part has agreed to chip in with around $4.2 billion in assistance, including a fresh hard currency deposit of $3 billion and a new deferred payment oil facility to the tune of $1.2 billion per annum. The total assistance from the two friendly countries thus comes to just under $13 billion.

This vital assistance comes at a time when Pakistan’s economy is in dire straits because of a variety of factors, including the economic impact of this monsoon’s cataclysmic floods, almost four years of gross mismanagement under the previous government, and the chronic distortions that have plagued Pakistan’s economy for years. Looking at the numbers for the first quarter performance of the economy, the government’s budget for fiscal year 2022-23 is already broken. Owing to a number of cost overruns and revenue shortfalls, the Q1 deficit has already ballooned to Rs800 billion.

A chartered accountant by training, Finance Minister Senator Ishaq Dar should have good purchase to curtail the deficit whether by increasing revenue or cutting back expenditure, and he will no doubt pursue all his options with all diligence. But there is a limit to how much such efforts can stretch the limited resources he has on hand to meet the economy’s colossal needs. On the other hand, to use the assistance of the kind we expect to receive from the KSA and China is scarcely the ideal means to finance a budget deficit. Cost-cutting gets thrown around a lot as a panacea for all ills of our economy but there are obvious limits to how far this can go in solving the problem when so much of the expenditure is unavoidable. Which brings us to increasing our revenues, and there is no doubt that even as we write this, Senator Dar will be pondering ways to expand the nation’s revenues, not least because ultimately, balancing the budget from our own resources is the only way to put our economy on an even keel, and especially as he and his team prepare to face the IMF for the 9th review of an Extended Fund Facility (EFF) that has helped keep the external sector of our economy afloat.

In theory, Pakistan’s reliance on the IMF has decreased after the fresh Chinese and Saudi assistance. True, we will be hard pressed to pony up the $32 billion to $34 billion we need to finance our external debt, but we are well clear of the default risk on external obligations that had loomed over the horizon for the past year or so. Nevertheless, IMF backing is important for Pakistan as it gives us access to Western financial markets. It is unfortunate that the Fund is not prepared to allow Pakistan much of a leeway in agreed targets under the EFF program on account of the economic devastation wrought by the floods. But given the state of Pakistan’s economy, Dar and his team would do well to view this as an opportunity rather than a challenge, and work harder than ever to put our house in order.