Friday June 09, 2023

No strings, no loans

By Editorial Board
January 20, 2023

Finance Minister Ishaq Dar, who has pinned great expectations of soft financing from friendly countries, may feel he has fallen out of step with the times after the Saudi finance minister’s categorical declaration that the kingdom is switching gears to tie loans to performance criteria. Addressing a World Economic Forum (WEF) conclave in Davos, Mohammed al-Jadaan said the kingdom used to give direct grants and deposits without strings attached, but now the kingdom would like to “see reforms” for any loans it advances. This must have come as a rude awakening for our finance ministry, since Dar has been flirting with the idea of raising soft loans from bilateral sources as an alternative to the IMF. But the shift is broadly in line with the global bilateral lending best practice and may well mean the era of no-strings-attached bilateral finance is gone. It may also put a damper on Pakistani hopes for the Saudi hard currency deposit with the Pakistani central bank being enhanced from to $5 billion in short order; or the Saudi investment inflows being enhanced from $1 billion to $10 billion any time soon.

The Saudi sentiment is also aligned with the wishes of the IMF as well as the desires of the US administration, which says it wants to see Pakistan in an “economically sustainable position”, but has no desire to lean on IFIs to extract concessions for Pakistan. The development comes at a time when this government’s stewardship of the economy and public interest has been conspicuous by its absence for months. All we hear is that the government is not prepared to put any more burden on the citizen; and that Pakistan is not about to default on its public debt repayments. The backdrop of these proceedings is a steady slide of the rupee, which inevitably translates into steadily rising prices and steadily declining wage and employment. The cost of living crisis is squeezing all but the richest, more and more Pakistanis sliding below the poverty line. Unscrupulous elements in trade and industry are taking advantage of the soaring prices to price-gouge consumers, and to hoard vital supplies. The markets know the government is not about to default, but with our forex reserves down to a few weeks’ import bill, investors want to err on the side of caution – and who is to blame them? Administrative curbs on imports and impossibly high cash margins on LCs are wreaking havoc on business and industry to the point that business leaders are publicly saying it has become impossible to continue in business. The bottom line is that the common Pakistani is shouldering twice the burden of this downturn, and this burden is increasing by the day.

There is likely politics at play here. Without going into the wilder scenarios involving behind-the-scenes power struggles and court intrigues, let us just say that PM Sharif and his PDM coalition are trying to hold on to whatever political capital they have left. But well-intentioned noises can scarcely placate a populace flailing in the clutches of the century’s worst cost of living crisis. Might not taking bold action to put the economy on an even keel be the better alternative then? First up, the economy needs a cash injection, the most convenient source in sight of which is the IMF, which threw Pakistan a $7 billion lifeline starting 2019, some $2.6 billion of which is still outstanding for Pakistan to access. All the government has to do is play by the pre-agreed rules. Dar, however, is insistent on running up unbudgeted expenses without the commensurate increase in revenue, in effect losing sight of a small primary surplus former finance minister Miftah Ismail promised Pakistan would achieve at the close of this fiscal. This is inexplicable because Dar is well versed with how the financial markets work. Successive administrations including the incumbent government have embraced and espoused the macroeconomic reform programme supported by the IMF’s Extended Fund Facility (EFF), the metrics and goals which are integral to our compact with the Fund. The lender of last resort is, therefore, within its right to hold the government to those commitments.

The long and short of it is that it is past the time for the government to straighten up and fly right. PM Sharif and his team must take bold and urgent measures that everybody knows are the need of the hour – like finding new sources of revenue and mending fences with the IMF forthwith. The correct way to spare people more pain is to tax the elites rather than resorting to deficit financing. If the government cannot deliver on this count, all talk of not adding to the common Pakistani’s burden will be seen as a veneer to mask its unwillingness to tax the rent-seeking elites, ultimately leaving the masses to foot the bill of both the elite capture and the elite missteps that led us where we are.