Awaiting a miracle

It can be argued that some of the economic pain and suffering could have been avoided

Awaiting a miracle


uper floods, political uncertainty and economic meltdown – each reinforcing the gravity of the other: Pakistan has withstood a lot during the last year. The current controversy on elections to the provincial assemblies in the Punjab and the KP is further aggravating the political uncertainty and the challenges facing Pakistan.

It can be argued that some of the uncertainty could have been avoided through sane actions taken well in time. In particular, the pain of the economic meltdown could have been lessened by taking timely steps to resume the current programme of the International Monetary Fund. The IMF Board approved the sixth review of the programme in February 2022. It took two governments (PTI and PDM) another six months to get the combined seventh and eighth reviews completed and approved by the board.

Timely completion of quarterly reviews (which got delayed on account of our reluctance to meet performance criteria for political reasons) could have made bailouts smaller, and the spending cuts required to put public finances on a sound footing less painful. Likewise, things could have been less painful had the programme not gone off-track after the August 2022 review.

After receiving the IMF tranche in August 2022, the government once again put the IMF programme on hold for almost four months. Since January 2023, it has taken many tough economic decisions to qualify for the release of the next tranche. However, there are still no signs of a staff-level agreement (SLA), which once reached has to be approved by the IMF Board.

Wondering why?

One of the quantitative performance criteria that Pakistan is struggling to meet for an SLA is minimum “net international reserves.” Simply put, Pakistan committed to maintaining a level of foreign exchange reserves that requires rollovers and financial assurances from its bilateral creditors, especially China, Saudi Arabia and the UAE. With some delay, China has rolled over part of its loans. However, despite agreeing in principle to such an arrangement, the Gulf countries are still in a “wait and see” mode.

Saudi Arabia is radically changing its debt diplomacy. In line with the practices of multilateral lenders, it is unwilling now to dole out money unless its borrowers are prepared to address the lacunae in their economic and fiscal systems.

Even if they had a lenient view of Pakistan, the prevailing political uncertainty is stopping the Gulf creditors from coming forth for an economic rescue. Saudi Arabia and the UAE have no preference for any political party/ parties in Pakistan and have been supporting every government in Islamabad. However, currently, they are waiting for the outcome of the next general elections. Dealing with whoever forms the government after the next elections will maximise the return for their goodwill gestures.

A recent development that is otherwise a very positive and welcome move but may reduce Pakistan’s significance for Saudi Arabia in the future is the Saudi-Iran détente. Pakistan has brotherly relations with both countries and maintained neutrality when they broke diplomatic relations with each other. However, Saudis have been asking for Pakistan’s support against the allegedly Iranian-backed Houthi rebels in Yemen. After the recent détente, one may hope for easing of tensions between Houthis and the KSA, reducing Saudi desire to grant special favours to Pakistan.

A positive development for Pakistan is the growing Sino-Saudi relations. Saudi Arabia has joined the Shanghai Cooperation Organisation as a “dialogue partner” and will become its regular member in due course of time. The growing ties between Riyadh and Beijing may help Pakistan. However, there are quite a few ifs and buts involved. Continuing with the much-needed IMF programme not only requires fine-tuning of our economic and fiscal policies but the foreign policy, too. The latter exercise must be undertaken to adjust to new regional realignments.

Pakistan has long relied on the generosity of its geopolitical allies to get the much-needed debt rollovers and emergency funding. Successive governments have been accustomed to last-minute financial rescues, leaving little incentive for any government to implement sustainable economic policies. This time around, friends, who have traditionally come to Pakistan’s aid, due to any all or none of the above mentioned reasons, are silent.

Awaiting a miracle

One of the quantitative performance criteria that Pakistan is struggling to meet for an SLA is minimum “net international reserves.” Simply put, Pakistan committed to maintaining a minimum level of foreign exchange reserves that requires rollovers and financial assurances from its bilateral creditors, especially China, Saudi Arabia and the UAE.

The delay in securing rollovers and financial assurances from them is increasing the economic woes for the government and the people of Pakistan. With each passing day without a bailout from the IMF, the government, in the run-up to general elections, is tempted to resort to popular measures (violating its commitments with the IMF) to please the voters. Such popular measures, like announcing a cross-subsidy on petrol for two and three-wheelers, amidst inconclusive negotiations with the IMF, can cause further delays.

As a standard contingency plan, the IMF has suggested to many countries caught in debt crisis (like Pakistan) to go for an “early” debt restructuring (in which the government would have asked its creditors to accept a delay or decrease in repayments) coupled with capital controls to prevent foreign exchange fleeing the country.

However, for Pakistan, debt restructuring is not an easy option.

The Western economies had established a framework for restructuring troubled debts. The initiative which began in 1956, brought bilateral lenders under the premise of rescheduling repayments for debt-struck countries on similar terms, ultimately prioritising debt cancellation. In 2020, the G20 developed a new framework, called the Common Framework, for debt solutions. Although signatories theoretically agree to accept comparable restructuring terms, restructuring has become more problematic.

In its current form, the G20 Common Framework, considers only state-to-state loans for restructuring. Private creditors, and international institutions (such as the World Bank and the IMF) are not required to cancel debts under this framework. One of the major lending arms of China, the China Development Bank (CDB) provides loans at market rates. China maintains that this qualifies its loans from CDB to be treated at par with “private creditors” and exemption from restructuring under the Common Framework. “If that is not acceptable then the debt of international institutions should also be restructured,” was China’s stance in Delhi during the G20 finance ministers’ moot last month. That impasse has made global debt restructuring more complicated and will be a potential challenge for Pakistan if it opts to go for debt restructuring.

Of the four countries that have sought assistance under the Common Framework - Chad, Ethiopia, Ghana and Zambia - only Chad has secured a deal. It involves rescheduling rather than debt cancellation. The other three are still negotiating with their bilateral creditors for debt restructuring. One of the challenges they face is a lack of clarity about how the bilateral creditors’ deposits will be treated if they default on their debt. This is also why Sri Lanka and Ghana struggled for months to get an IMF loan despite defaulting on their sovereign debts.

Most of Pakistan’s $92 billion external debt is sourced from concessional multilateral and bilateral sources (including CDB). Its next payment of $1 billion for Euro bonds is not due until April next year. However, the silence of bilateral creditors on rolling over and/ or restructuring their debt means that Pakistan continues to be in the red.

As Pakistan flirts with a default, Sri Lanka’s pre- and post-default experience should serve as a sobering reminder. In Sri Lanka’s case, former president Rajapaksa’s economic policies led to a situation where opposition parties, due to lack of any solution to avert default, were not willing to form the government or bring a no-confidence motion against him. The economic crisis led to a political mess and social unrest forcing Rajapaksa to leave the country to save himself from angry rioters, protesting against inflation and lack of availability of essential items (especially fuel and medicine that the Sri Lankan government was unable to import due to lack of foreign exchange). The island nation, under the new president, struggled for more than ten months to get financial assurances from China and India before it could get a bailout from the IMF last week.

The political turmoil and rifts among constitutional offices are aggravating Pakistan’s economic problems. Any social unrest will further erode the political and economic stability and lead to a vicious cycle of instabilities. It is about time the political leaders, both government and opposition, stopped triggering social chaos. Friendly countries may step up to help Pakistan. However, they tend to help nations, not mobs.

The writer heads Sustainable Development Policy Institute. He tweets at @abidsuleri

Awaiting a miracle