Pakistan is struggling for post flood devastation relief and reconstruction and facing a huge resource gap despite getting restored IMF’s Extended Fund Facility (EFF) and World Bank’s intent of clubbing of two of its policy loans over USD 1 billion and Asian Development Bank’s (ADB) indication to provide approximately USD 1.5 billion emergency loans. The problem has in fact prompted the Pak Government to levy an unpopular super tax with three rates PRs.3000/-, PRs.5000/- and PRs.10,000/- to collect PRs.41 billion tax from shopkeepers and an additional tax of 5% on manufacturers having zero contribution to exports. The decision of the IMF to extend EFF to end-June 2023 and rephasing and augmentation bringing the EFF to USD 6.5 billion would give only a temporary relief. The 7th and 8th tranche would release about USD 1.17 billion under EFF for Pakistan.
The pressure of resource gap is mounting as Pakistan is unable to seek foreign aid or loans due to its non-performing economy with slow growth, twin deficits, shrinking foreign exchange and uncontrolled inflation. Due to poor macro-economic indicators its sovereign credit rating has slipped to non-investment grade. Citing Pakistan’s weakening economic condition, Moody’s, Fitch, and S&P Global – all major global rating agencies – downgraded Pakistan’s long-term rating from stable to negative in July. These agencies had also highlighted country’s weakening external position, higher commodity prices, rupee’s depreciation and tighter global market conditions.
It is evident from the recent disclosure of Finance Minister Miftah Ismail stating that “none of the friendly countries is ready to financially support Pakistan” because it “has an imbalanced economy”. These disclosures were made by Ismail while addressing an interactive session with the business community, CEOs of leading companies, financial and legal experts. Islamabad is experiencing huge differences between imports and exports. And despite recent measures taken to ban import of various items, Pak imports continue to rise.
While policy makers in Islamabad are firefighting to manage economy in the aftermath of catastrophic floods, the funds arranged from the IMF to avert default in foreign debt is also causing a lot of pressure on the economy due to stringent conditionality on the country which has seen very fragile growth during Covid-19 period and accumulated unsustainable debt and current account deficit overtime. The IMF conditionality include hiking power tariffs, imposing a levy on petroleum, higher revenue mobilization and restraining expenditure to reduce fiscal deficit, continued adherence to market determined exchange rate and setting up an anti corruption task force to curb graft in government departments.
Further, Pakistan is unable to boost its exports to overcome its ever belonging trade deficit. Due to lack of diversification and value addition, many industries could not contribute for country’s exports basket but kept on importing raw material to cater to internal markets. Ismail admitted that only the textile sector is contributor of forex reserves with USD 20 billion in exports. For increasing exports, Pakistan needs to focus on its comparative advantage and collaboration with the foreign companies which could help industrial growth by technology transfer as well as providing capital for industrialization. Just by relying on China has not helped much and would not do well even in future.
The World Bank agreed to a total disbursal of around USD 1 billion clubbing two of its policy programmes, namely Resilient Institutions for Sustainable Economy (RISE-II) and Programme for Affordable Energy (PACE-II). It is to plug Islamabad’s financial gap despite commitments from the IMF and assurances of USD 4 billion from friendly countries. However, the present conditions of country’s fiscal and macroeconomic framework are hurting disbursement. Connected to this is unlocking of a USD 450 million loan by the Asian Infrastructure Investment Bank.
Pakistan has been taking the World Bank assistance to fix power sector woes since the mid-1990s and the current situation in the power sector is threatening its viability.
Islamabad is also approaching the ADB for emergency loan which is at a higher rate of interest. Though it does not carry conditions but the loan is secured for only seven years, 18 years shorter than the standard loan tenure. Critics expressed concerns over unfavourable terms of the loan as the interest rate translates to over 3%, one of the most expensive rates by the standards of the multilateral lenders like ADB and the World Bank.
Pakistan is also facing other pressures. The Power Purchasing Agreements (PPA) of the China-Pakistan Economic Corridor (CPEC) is contentious issue between Pakistan, China and the IMF and the main condition is to “reduce circular debt flow through reducing power generation costs and retargeting electricity subsidies”. Pakistan cannot achieve macroeconomic stability until its power sector is fixed. The IMF has also flagged the abrupt growth slowdown in China as major concern as its financial elbow room leverage, a key strategic partner, is shrinking.
Macro economic imbalances are now hurting Pakistan from all sides. Prime Minister Shehbaz Sharif, presenting dismal picture of the country’s economy, also regretted recently that even friendly countries are ‘fatigued’ by its aid seeking behaviour. The countries in the Arab world, especially Saudi Arabia, could not provide much even as relief for flood-affected people. Despite the UN Secretary General’s appeal to the world for USD 150 million flood aid, Pakistan has received only a minuscule, USD 38 million, so far. Pakistan feels much more isolated, more than it has ever felt. It is being pointed out that rather solely relying on China, Pakistan should explore the complementarities with the South Asian countries, including India and Central Asian countries by removing infrastructure and trade barriers.