The success of the three-day visit of Prime Minister Imran Khan to Saudi Arabia must be gauged by the Kingdom’s decision, communicated to Pakistan authorities a day after the Pakistani delegation’s return, to extend 3 billion dollar safe deposit support for one year (till the completion of the International Monetary Fund programme scheduled for September 2022) and 1.2 billion dollars deferred oil payment facility (which adviser to PM on finance Shaukat Tarin in his press conference stated the expectation was 1.5 trillion rupees). Prime Minister’s detractors who had criticised the timing of the visit due to the ongoing protests in the country, with a potential to escalate into violence, if past precedence was anything to go by would surely be silenced.
For the first time in Pakistan’s history of borrowing from the Fund as and when the current account deficit became unsustainable (Pakistan is currently on its twenty-third programme) a condition that the country never faced in its previous programmes was stipulated in the July 2019 documents notably: “strong financial support to the authorities’ policy efforts by Pakistan’s international partners is essential to meet the large external financing needs in the coming years and allow the programme to achieve its objectives” or, in other words, assistance must be rolled over for the programme duration.
Three friendly countries supported Pakistan pre-IMF programme: Saudi Arabia (3 billion dollars plus 1.2 billion dollar deferred oil facility later withdrawn except one billion dollar deposit – withdrawals made up by China to meet the Fund condition), one billion dollar from the United Arab Emirates (UAE) and the rest from China.
The question is why did the government feel the need to seek assistance at this point in time after claiming that economic stabilisation has been achieved and the country has embarked on a growth trajectory? This question is particularly pertinent as the current account deficit is not under stress in spite of the rise in the trade deficit (11.6 billion dollars July-September 2021) as remittance inflows continue to rise and reached another historic high of 8 billion dollars July-September 2021; and foreign exchange reserves as per the State Bank of Pakistan were 17.4 billion dollars 15 October 2021 though more than 50 percent constitute debt (Eurobonds/sukuk and swap arrangements). The 3 billion dollars from Saudi Arabia too is not a grant. Nor is the 1.2 billion dollar oil facility.
Could it be that the large external financing needs projected at 38 billion US dollars pre-Covid for the thirty-nine months of the programme, has increased post-Covid, with the government budgeting more than 17 billion dollar external inflows for the current year, may not be available to Pakistan given the state of the economy? This is a possibility; however, the Saudi support does not imply that the Fund programme will be abandoned for the simple reason that being on the programme provides a comfort level to bilaterals and multilaterals and their pledged assistance would then resume.
Another question is whether this substantial inflow from the kingdom will have any impact on easing the politically challenging conditions that remain the stumbling blocks in the successful conclusion of the sixth review negotiations with the IMF under the 6 billion dollar Extended Fund Facility (EFF) programme. There is no linkage between the Saudi package and the Fund sixth review, Tarin stated categorically during the press conference, adding that the sixth review is near completion with a point or half remaining to be agreed. It is, however, relevant to note that the government has already announced a raise in the base electricity tariff this month, agreed to be implemented from June in the second to the fifth review documents but which was initially opposed by Shaukat Tarin, and an ordinance slashing tax exemptions of 330 billion rupees is reportedly ready for vetting by the Law Ministry subject, one may assume, to the successful completion of the sixth review talks.
Reports indicate that the Fund has verified the higher growth rate of 3.94 percent against 2 percent that was initially projected for 2020-21, which would naturally imply a revisit of the conditions agreed in February 2021 that are reflected in the budget for the current year: (i) tax collection target of 5.9 trillion rupees one may assume would be revised upward; (ii) a reduction in current expenditure – budgeted at a whopping 8.5 trillion rupees as opposed to 4.29 trillion rupees in 2017-18 (including the repayment of 428 billion rupees external loans) which is likely to lead to opposition to any additions in expenditure including on the Kamyab Pakistan Programme; (iii) power sector circular debt continues to rise with the Fund insisting on zero inflow of circular debt which implies higher tariffs than agreed in February; (iv) the implementation of a single treasury account that may impact on the financial health of banks as well as releases to some entities; and (v) last but not least, decisions that would snip the budgetary outlay on poorly performing state-owned entities be it through privatisation or restructuring.
Tarin during his press conference maintained that the Fund is focused on the primary deficit, minus domestic and foreign borrowing, and this remains a source of concern to independent economists because the rise in domestic and external borrowing has reached a historic high fuelling inflation – domestic from 16.5 trillion rupees inherited by the Khan administration to 26 trillion rupees today and while 15 billion dollar external borrowing was used to repay past loans yet around 5 billion dollars was procured to fund current expenditure. Additionally, the rupee erosion – from 152 to the dollar in May 2021 to 175 rupees today has added onto the current expenditure as each rupee loss vis-a-vis the dollar adds 100 billion rupees to our debt service/repayment obligations. The way out of the current economic morass is clearly to slash current expenditure though here the political compulsions appear to continue to outweigh the economic compulsions.