Desperate times call for drastic measures. By increasing petroleum prices the government hopes to dodge sovereign default, salvage the International Monetary Fund (IMF) deal and leverage the support of multilateral financial institutions and friendly nations to stabilise the economy. A Chinese package is said to be in the works.
The government acknowledged that the petroleum price hike will spin the inflationary spiral faster, at least in the immediate future, but defended the move as ‘an unavoidable compulsion’. The government did try to underplay the impact of jacking up petroleum product prices by projecting the possible devastating consequences of inaction on families and businesses mentioning Sri Lanka’s fiasco after the default.
Talking to the media, Finance Minister Miftah Ismail said that the government prioritised state interests over the coalition’s political interests. “We are well aware of the political risk that such harsh steps entail especially when the public is already enduring crushing inflation and the opposition party PTI is already on streets hell bent to dislodge the government. It will erode our political capital somewhat but the current quantum of petroleum costing about Rs120 billion (three times the monthly cost (Rs40bn) of civil administration) was simply not viable anymore. For us the interests of the state take precedence over the party’s interests,” he asserted.
Dismissing the chances of premature dissolution of assemblies and early elections, he assured that the IMF package will soon be revived, currency slide arrested, market confidence restored and targeted relief for the poor secured.
China will help if push comes to shove but would like to keep it quiet since open support could derail talks with the IMF
Talking about support from China he was optimistic as he said engagements of Prime Minister Shehbaz Sharif and Foreign Minister Bilawal Bhutto Zardari with Chinese counterparts were both positive and productive. “Chinese support was not linked to the IMF deal but we are making good on our commitments to them besides removing some irritants preventing the fast-paced progress of the China-Pakistan Economic Corridor (CPEC)”.
Responding to a query from Doha last week he anticipated the current round of IMF talks, expected to resume on Monday (today) after a brief gap to yield results soon. “Yes they are showing greater understanding and flexibility,” he wrote back.
The Council on Foreign Relations (CFR), a body that tracks sovereign default risk, recently placed Pakistan’s scoring at 10 (indicating 50 per cent or higher chances of defaulting), equivalent to countries such as Sri Lanka, Ukraine, Russia, Venezuela, Argentina, Ghana, Tunisia. Some of these nations have already defaulted.
The details of Pakistan’s profile on the CFR Index website show Pakistan’s current account at -4.5pc of GDP, external debt at 42pc of GDP, short term debt and current account at 107pc of revenues, government’s debt at 68pc of GDP, political instability index at -1.9 and credit default swap spread at 824 basis points.
On the CFR Index, the score of India is 1 and Bangladesh is 3. Sovereign risk implies that a government will default on their binding liabilities or impose foreign exchange regulations that hurt foreign exchange contract values.
A key leader of the last government blamed the current economic slide on the elements who engineered the untimely ouster of former prime minister Imran Khan’s government when finally it managed a handle on the economy and key indicators started to look up. He thought a caretaker set up, free from the pressure of the electorate, holds better chances of pulling the country out of the quagmire.
“Pakistan’s economic fundamentals were moving in the right direction except for the impact of the international commodity rate cycle, which was affecting both, inflation and current account deficit (CAD). With the CAD slowly improving to less than a billion dollars a month, a last push to reduce some non-essentials imports would have done the trick.
“However, the regime change brought in political instability and the new leadership got scared of taking the tough decisions on fuel adjustments. This led to the delay in agreement with the IMF and resulted in the depreciating rupee and depressed market sentiments.
“All is not lost though, the government should roll back the oil subsidy in stages, revive the IMF program, get Chinese and World Bank/Asian Development Bank loans and live happily thereafter,” he responded a day before the government’s announcement on oil prices.
An imminent economist believes the political leadership in Pakistan has been in denial. He argued that high expectations from China are misplaced and that hoping for a generous IMF deal without assurance to roll back CPEC is silly.
“Who are we fooling? China signed deals under the CPEC on its own terms. Even if China does in the end roll over the repayment schedule and agree to extend some financial support it might buy us some time but economic stability and progress are hard to comprehend in absence of fiscal adjustments and structural reforms. We need our own economic doctors to fix it.
“It is very clear that the IMF suspects its money is used to settle Chinese bills. It is clearly unwilling to let its money land in the coffers of US rival China.”
A keen watcher saw China as the ultimate saviour of Pakistan after the Almighty. “I feel that China will provide support if push comes to shove, but would like to keep it quiet. Open support could derail talks with the IMF. The payment obligations related to CPEC are not transparent enough, a sticking point with the IMF”.
Nasim Beg, a senior business executive who sits on multiple boards, supports measured withdrawal of oil and power subsidies but insists on the need to strengthen the social security net to lend support to the needy.
“My gut feeling is that the recent foreign minister visit to the US will prove to be rewarding. I expect the IMF to show more flexibility now and allow a gradual increase in rates. Besides, Pakistan’s most dependable friend China silently supports Pakistan’s efforts to revive the IMF programme.
“I believe the petroleum subsidy hurts more than it helps by rewarding the irresponsible wasteful consumption pattern burdening the nation with heftier oil import bills. We have seen a volumetric increase in imports that could have been curtailed by optimising oil consumption and curtailing imports.
“The government needs to cut back on other spending heads and increase direct transfers to at least the 12 million poorest families identified for Covid relief and try to extend it to cover 25m families.”
Published in Dawn, The Business and Finance Weekly, May 30th, 2022