“Given my interactions with the International Monetary Fund (IMF) and the dialogue decisiveness of the current government, I feel very hopeful that there will be a successor programme from the Fund,” said the Asian Development Bank’s (ADB) Country Director for Pakistan Yong Ye in an exclusive interview on the sidelines of ADB’s 57th Annual Meeting in Tbilisi this week.

Tacitly indicating that support from ADB would only be possible with a clean chit from the Fund, Mr Ye expressed cautious optimism for the economy. Highlighting the uncertainties from last year, Mr Ye termed the IMF agreement announced in June as a ‘miracle’. Since then, however, he said, the caretaker government did a good job stabilising the economy under the Fund’s Stand-By Arrangement. More importantly, he added, with the IMF agreement in place, the central bank’s foreign exchange reserves increased from $4.4 billion to over $9bn in the week ending on May 3.

“While the country may still be in the ICU, its immediate liquidity crisis has been sorted, and default has been avoided. This has given some confidence to the markets,” he said.

Record highs of PSX

Commenting on the frequent new highs of the Pakistan Stock Exchange (PSX), Mr Ye observed that previously, when the eurobond payment was due, there had been a lot of hype in the media with speculations about whether the country would be able to repay or default. “Such pieces did not induce courage and the markets started fluctuating, contributing to a fluctuating exchange rate.”

Bank’s top official says Pakistan has sorted out immediate liquidity crisis, but still in ICU

This time around, in April, when the $1bn eurobond payment was due, it was paid without fanfare, indicating much better market confidence. Other positive indicators, such as a narrowing external account deficit and recovering remittances, have also improved investor confidence. However, fiscal deficit challenges remain. One major reason behind them is the high interest rate and high debt servicing burden.

‘Act on what you know’

“In my first meeting with Finance Minister Muhammad Aurangzeb, he showed his commitment to implementing and acting on reforms,” said Mr Ye. Pakistan does not need more economic prescriptions, he said, agreeing with the finance minister’s recent statements. He said the general perception is that Pakistan knows what it needs to do but never does it. “Act on what you know needs to be done.”

He emphasised that the ADB management wants to be with the government in this difficult time. The agency understands the need to ensure that the debt is sustainable rather than an added burden that does not remove the constraints the country is facing.

While the economy is recovering, there is still uncertainty moving forward. The removal of this uncertainty depends very much on the government’s commitment and ability to implement economic and structural reforms.

A special arrangement

Mr Ye emphasised the importance of investment in reviving the economy and the role the Special Investment Facilitation Council (SIFC) could play.

“My understanding of SIFC is that it is a special arrangement to attract foreign direct investment from some targeted countries,” he said.

From the ADB’s point of view, while the SIFC may be a quick short-term solution, Pakistan still needs to look for long-term systematic solutions to attract foreign direct investment. This would require an overall enabling environment with improved regulations and transparency.

Given past unsuccessful incidents such as Reko Diq, SIFC, at least in the short run, can demonstrate the country’s potential and ability for investment, which can then be further broadened for other countries.

An important element in attracting FDI is the ability of firms to repatriate profit out of the country.

At the moment, investors may believe that while earning money in Pakistan is possible, repatriating profits is challenging.

Non-productivity of real estate

The country needs to increase its revenue and rationalise expenditures, Mr Ye remarked. As an example, he highlights the real estate sector where a lot of savings are invested. The real estate sector is “just financial addition with no value addition. If the country invests in its natural resources instead, the country will start rolling,” he said.

Inflation is on a downward trend, and if this trend continues, the monetary policy rate will come down, Mr Ye opinioned, resulting in a smaller burden of debt servicing and more fiscal room. This will also unlock the investment and borrowing by the private sector, he hoped.

Since there is a lot of pent-up investment demand during the period of high interest rates, Pakistan may enter into a boom cycle when the rates start coming down. But for the revival to be sustainable, ‘it all comes back to reforms’,’ he said.

Remaining pledges

While ADB was among the institutions that pledged support after the disastrous floods of 2022, almost the entire amount has yet to be disbursed. ADB had pledged about $1.5bn, of which only $108.79 million has been released according to a media report, with a further $340.9m expected this year.

In response to why there has been a delay, Mr Ye said that the amount pledged was for reconstruction and that the process cannot be rushed. “The damages have to be assessed along with the ground realities, keeping in mind the new climate risk profile and the possibility that these areas may be flooded again,” he said.

Pointing out that water was still standing in some areas till the start of this year, Mr Ye said that the new climate risk profile needs to be assessed before the feasibility study. Some roads need to be redesigned, followed by the procurement process, contract award, and finally, disbursement. The entire process is lengthy.

Mr Ye identified several critical areas for Pakistan’s long-term economic growth. These include controlling inflation, reducing the fiscal deficit, and diversifying the export base.

Published in Dawn, May 12th, 2024