Holes in the package boat

Updated 27 Apr 2020


Source: Media reports and NDMA
Source: Media reports and NDMA

IT’S a bit like Ramazan. Since the entire country is fasting together, a conducive environment is created compared to a lone soul abstaining for a month.

Similarly, the whole world is in the same pandemic boat: pumping money into the economy, valiantly paddling to stay afloat while heading towards a waterfall of Niagara proportions.

Let’s contextualise the big numbers being thrown around. For example, as per its official website, the Diamer-Bhasha Dam would cost around $12 billion (2008 estimate). At the exchange rate of Rs161, this comes around to Rs1.93 trillion. Thus, the financial relief package to battle one of the biggest economic crises in recent history is one-third smaller than the cost of the dam the country was trying to build.

But blood can’t be squeezed out of a rock and Pakistan has a lot of loans and very little money. That is where aid comes in.

After the International Monetary Fund (IMF) pledged the additional concessionary financing, the Asian Development Bank (ADB) pulled out the big guns as well. The World Bank has approved $200 million with an extra $38m from eight existing projects for urgently needed medical equipment and supplies. This takes the total international funds to $3.34bn, which comes to Rs538bn, roughly half of the government’s relief package.

If there was ever a time to go deep in debt and beg, borrow and steal to finance relief measures, it is now

However, if experience has taught us anything, it is that IMF aid comes with strings attached. Then there is the little matter of debt servicing, which already has the lion’s share in the beleaguered budget. Admittedly, if there was ever a time to go deep in debt and beg, borrow and steal to finance relief measures, it is now.

“Borrow now and bear the toll later” has been Pakistan’s motto for decades. The debt relief extended is just a deferment of what was due this year, which means together with the new loans (with possibly more to follow) Pakistan will just be deeper into choppier water further down the road.

Ranging from the government to business donations, assistance from China is more in the form of the paraphernalia needed to fight the pandemic battle. The numbers stated are as of April 22. The inadequacy of existing supplies can be gauged by Sindh’s Provincial Disaster Management Authority’s request of 5.6m surgical masks of which 156,000 were received from the National Disaster Management Authority (as of April 24). The total donation of masks/face shields by China is less than the requirement of a single province.

The viability of measures provided by the relief package is suspect as well. For example, keeping aside the demand and supply dynamics of small-scale houses, how can construction activities start in earnest when a realistic timeline for a vaccine is late 2021? And that too while not accounting for the mammoth task of administering it to a population of 220m, many of whom refuse the polio vaccination.

Then there is the amount earmarked for fuel prices. At the time the package was announced, the West Texas Intermediate oil price had not dipped down in the negative. The relationship between a litre of petrol in Pakistan and American crude oil is not so linear that a decrease in the rate is entirely good news.

This is in part because Pakistan does not purchase oil from the United States and in part because of the floor price protection offered to exploration and production companies. Low prices discourage fresh exploration investment and development and thus have long-term economic impacts.

Having said that, the announced reduction of Rs15 will be offset by the decrease of Rs23-30 per litre for May. So like the construction package, the amount set aside for fuel raises multiple questions.

The central bank has also jumped into the fray by preventing the rupee from skydiving without a parachute. The State Bank has also taken a myriad of macro-economic measures that include a sharp policy rate cut, refinancing facilities and regulatory actions to maintain banking system soundness.

Given the ramblings of the ‘leader of the free world’ about injecting disinfectants, our prime minister is sane in comparison. Then there was the suicide of the German finance minister indicating how seriously government officials are affected while trying to contain the damage. Countries around the globe are operating in damage-control mode, scrambling to salvage their economies, making mistakes and getting some things right along the way. Pakistan is no different.

Published in Dawn, The Business and Finance Weekly, April 27th, 2020