FINANCE Minister Ishaq Dar seems to have run out of steam ever since he returned from Washington.

His aggressive approach towards the economy and the exchange rate is absent. He is no longer talking about bringing the dollar down to below Rs200, and the “befitting response” promised to Moody’s after it downgraded Pakistan’s rating, has yet to materialise.

All of this only suggests that the economic crisis is deepening. Another leading ratings agency, Fitch, also downgraded the country’s rating earlier this week. With it, hopes of borrowing from commercial markets have faded away and inflows from credit sources have dried up, claims Rashid Masood Alam, a seasoned banker currently associated with a World Bank’s subsidiary providing funds to banks for low cost housing in Pakistan.

Read: Daronomics — good or bad for the economy?

Mr Dar took office, for the fourth time, with the challenge of getting the economy out of one of its worst balance-of-payments crises that has seen foreign reserves falling to a level that merely covers a month worth of imports.

With forex reserves propped up by Saudi and Chinese deposits and nothing left to mortgage for more loans, the question facing Dar is ‘where do we go from here?’

Forex reserves held by the State Bank of Pakistan (SBP) currently stand at $7.6bn, but in practical terms, they are closer to zero; $2.3bn of it was credited by China, $3bn deposited by Saudi Arabia and $1.2bn came from the IMF. The rest is also based on borrowings from commercial banks.

Pakistan’s Eurobond — issued in a currency other than that of the country or market in which it is issued — slumped to a third of its face value, something investment bank JPMorgan has described as “justified”.

At the moment, Pakistan seems to be isolated. “There’s nothing to sell or to be mortgaged for borrowings from international markets,” says Samiuallah Tariq, the head of research and development at Pakistan Kuwait Investment Company (Private) Limited.

Creditors are not ready to support Pakistan and the prospect of a default still looms large, claims Mr Alam. Previously, two wars in neighbouring Afghanistan somewhat helped Pakistan’s economy, but there’s no such situation this time around.

The country needs about $32bn this fiscal year to make payments against foreign obligations, mostly for debt servicing and meeting the current account deficit.

‘Dar-onomics’

Mr Dar, who took the oath as finance minister on Sept 28, visited Washington earlier this month to participate in the annual meetings of the IMF and the World Bank.

There, he told Reuters that he would seek the rescheduling of some $27bn worth of non-Paris Club debt largely owed to China, but would not pursue “haircuts” as part of any restructuring.

The minister also ruled out the possibility of a default on Pakistan’s debt, an extension of the maturity date on bonds due in December or a renegotiation of the country’s ongoing IMF loan programme.

But his recent visit to Washington doesn’t seem to have brought any good news for the economy. In fact, observers have said that disappointment was clearly visible. He is now heading for China with a list of offers in exchange for the rescheduling of $23bn in consortium loans.

However, he has made it clear that he would not approach China any differently than other countries. “God willing, there will be no possibility. Pakistan will not default,” he told the Voice of America.

But apart from the question of what Mr Dar can offer to China, to which Pakistan owes the biggest chunk of its external debt — roughly $30bn — it is clear that the main purpose of the visit is to request a rescheduling of loans.

Pakistan’s external debt is more than $130bn, and its debt-to-GDP ratio is around 75pc. The rupee, which went into free fall earlier this year, losing around 30pc against the US dollar, bounced back to 217.8 after Mr Dar’s return to the helm. However, it has been on the decline once again, closing at Rs220.8 on Friday.

Pakistan’s domestic bonds offer about 16pc guaranteed returns, but foreign investors have shown no interest. Instead, the leftover amount is being withdrawn.

According to the latest SBP data, the inflow of foreign investment in treasury bills and Pakistan Investment Bonds in October has so far been zero, against an outflow of $10m.

A similar situation was witnessed in September, when foreign direct investment plummeted 47pc in the first quarter of this fiscal year, while remittances dropped $300m.

Pakistan received about $30bn in remittances in the fiscal year 2022. Despite such a huge “free of cost” inflow, the current account deficit kept going up and hit $13.3bn in the previous fiscal year.

Comparisons with Sri Lanka

In this scenario, Mr Dar is heading for Beijing, which seems to be the only hope to save the economy from default. However, given the case of Sir Lanka, it looks like it wouldn’t be an easy ride for Pakistan in China.

Sri Lanka is China’s partner in the Belt and Road Initiative of $4 trillion. It formally handed control of a strategic port on its southern coast to China on a 99-year lease agreement in September 2018 under a $1.1bn deal, described as a “sell-out” move by that country’s political opposition and trade unions.

Chinese firms now hold a 70pc stake in the Hambantota port. The $1.3bn port was built with loans from a Chinese state-owned bank and opened in 2010. But the Sri Lankan government has struggled to repay the debt, with the project incurring heavy losses.

Along with loans taken out for other infrastructure development projects, Colombo owed Beijing a total of $8bn.

The Sri Lankan economy tanked earlier this year. Its prime minister said in July that the island nation’s debt-laden economy “collapsed” as it had run out of money to pay for food and fuel.

Short of cash to pay for imports of such necessities and already defaulting on its debt, it sought help from neighbouring India, China and the International Monetary Fund, but to no avail.

Still, Mr Tariq of Pakistan Kuwait Investment Company believes “China still needs Pakistan”. He said, “We need to pay around $10bn to China in a year. Pakistan wants to defer these payments for three to four years, but I believe the rollover is possible for one year.”

However, the financial sector has been battered by one crisis after another. Currently, its biggest worry is: can a short-term government bring long-term stability?

Published in Dawn, October 25th, 2022