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A warning for the powers that be
There have been some positive developments on the external front in the last couple of weeks. The Asian Development Bank (ADB) has signed six deals with Islamabad to help the cash starved government access $1.2 billion over the next several months. The World Bank has also approved a $350 million package for Pakistan’s budget financing for the Second Resilient Institutions for Sustainable Economy (RISE-II) project after a two-year delay.
The International Monetary Fund (IMF) will likely release the second tranche of $700m from its $3bn stand-by arrangement (SBA) programme following a meeting of its executive board on January 11. More crucially, Saudi Oil giant Aramco has formally entered Pakistan’s retail oil market by acquiring a 40 per cent stake in Gas & Oil Pakistan Ltd (GO) — a private entity established almost a decade ago — with an estimated investment of about $100m.
The entry of Aramco, one of the world’s leading integrated energy and chemicals companies, into Pakistan’s market is widely regarded as a major development. The oil giant’s decision is also seen as part of the Saudi commitment to invest $25bn in Pakistan.
Overall, Pakistani authorities are hoping for a total investment in the range of $100bn from the Gulf states, including Saudi Arabia and the United Arab Emirates. A Special Investment Facilitation Council (SIFC) was created by the previous coalition government led by Prime Minister Shahbaz Sharif in June this year to help materialise these investments in priority areas of energy, information technology, mining and agriculture by fixing the regulatory regime and ensuring policy consistency.
Renewed political volatility will jeopardise IMF negotiations and external funding
The Council gives the army a seat on the economic decision-making table, which many analysts say would give the Gulf investors much comfort in bringing their capital to Pakistan. The SIFC is targeting the materialisation of the Gulf investments over the next five years.
Many analysts expect the release of this crucial multilateral cash to boost the country’s foreign exchange reserves to around $9bn by the end of this fiscal year. The State Bank of Pakistan (SBP) reported last week that its foreign exchange reserves fell below $7bn for the first time in the current fiscal year, posing challenges for the government to stabilise the exchange rate and meet debt servicing obligations.
The SBP has reported a $136m decline in reserves to $6.9b due to debt repayments. This outflow of dollars brought the total SBP reserves to a five-and-a-half-month low during the current fiscal year, decreasing from the peak of $8.8bn in July. The reserves have continuously declined since, with the SBP losing $1.8bn to date as the government falls short of the foreign borrowing target set for the current budget.
The latest data from the Pakistan Bureau of Statistics showed a 51pc shortfall in external borrowing. The country raised $4.3bn compared to the annual target of $24.2bn and a five-month target of $10bn. The Economic Affairs Division (EAD) reported that the country had secured $6.4bn in foreign loans in budget support, bridging facility and project financing during the first five months of the current fiscal year to November, equaling one-fourth of the revised annual requirement.
Barring July, foreign loan receipts remained low in the other four months. A major chunk of $5.2bn was received in budget and reserves’ loans, constituting 81pc of total borrowing in five months. The EAD hopes for a surge in disbursement in the coming weeks on the back of some “bullet borrowing”.
The government has yet to secure any foreign commercial loan, forcing it to bridge the gap through import restrictions to keep outflows minimal to protect the reserves. It targets $4.5bn in commercial financing and $1.5bn in Euro bonds this fiscal year.
The slowing official, private and commercial inflows are attributed to the nation’s weak economic fundamentals, resulting in poor credit rating, the Ghaza situation, and uncertain political conditions as the country moves ahead towards elections on February 8.
In its July staff-level report, the IMF underlined that the medium-term risks to Pakistan’s debt “are high”, including uneven programme implementation, political risks and access to adequate multilateral and bilateral financing in view of the high gross financing needs.
The IMF has since revised the country’s foreign loan requirement estimate for this fiscal year compared with July, lowering it from previous estimates of $28.4bn by nearly 15pc to $25bn. The lender has now projected a current account deficit of $5.7bn, down about $770m compared to its old estimate.
The government, however, is hopeful of narrowing the current account deficit to $4.5bn. The deficit stood at only $1.1bn during the first five months — down by more than 61pc from the last year — offsetting the low foreign loan inflows.
In the meanwhile, Fitch, one of the three largest global rating agencies, left Pakistan’s long-term foreign currency issuer default rating unchanged at ‘CCC’, which reflects high but easing external funding risks amid high medium-term financing requirements and is based on the last month’s IMF staff-level agreement on the first review of the nine-month SBA facility. This was in spite of some stabilisation and the country’s strong performance on its current SBA with the IMF staff.
The agency was of the view that Pakistan’s overall external funding targets of $18bn (gross) for the current fiscal year were ambitious against nearly $9bn in government debt maturities. The maturing debt includes a $1bn bond due in April and $3.8bn to the multilateral creditors, excluding routine rollovers of bilateral deposits.
“At the end of September, maturities in the remaining three quarters of FY24 were just over $7bn,” it said, adding that the funding target included $1.5bn in Eurobond/sukuk issuance and $4.5bn in commercial bank borrowing, which “will likely prove challenging”.
Fitch said a follow-up IMF programme would have to be negotiated quickly after the SBA finishes in March next year, adding there was still the risk of delays and uncertainty around Pakistan’s ability to do this. It also takes note of risks to policy implementation.
“Parties across Pakistan’s political spectrum have an extensive record of failing to implement or reversing reforms agreed with the IMF. We see a risk that the current consensus on the measures necessary to ensure continued funding could dissipate quickly once economic and external conditions improve, although Pakistan now has fewer financing options than in the past,” it said. Therefore, any follow-up IMF programme would likely require Pakistan to “undertake sweeping structural reforms in opposition to entrenched vested interests”.
The other risk to policy implementation — and, by extension, to negotiations for a new loan from the IMF — stems from political instability in the country. It expects general elections to take place as scheduled and produce a coalition government “along the lines of Shehbaz Sharif’s government”.
At the same time, it expressed concern over the uncertainties surrounding the upcoming elections and the potential for political volatility, which could impact the implementation of structural reforms and pose economic challenges.
“The elections could endanger the durability of recent reforms and leave room for renewed political volatility. Space for political expression has shrunk since widespread protests in May 2023,” it observed and warned that further delays to elections or renewed political volatility could not be excluded and would jeopardise IMF negotiations and external funding.
That should be a warning enough for the powers that be.
Published in Dawn, The Business and Finance Weekly, December 25th, 2023
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