Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Year 2022 is bidding farewell to Pakistan leaving behind some unpleasant memories, natural disaster in the form of floods as well as self-inflicted political instability and economic uncertainty. The negative outcomes of ad-hoc arrangements and unwise economic policies of coalition government of Pakistan Tehreek-e-Insaf (PTI) would continue to haunt the nation in 2023 and beyond. The untenable subsidies extended by PTI government to mellow down political temperature in the wake of no-confidence motion led to an upheaval, exhausting economic buffers. Violation of the conditions agreed with the lender of last resort for structural reforms for political gains, have proved counterproductive.
At the time of PTI government’s ouster, Pakistan was facing an acute crisis on the external front, trade deficit reached US$ 36.57 billion by April 30, 2022 and culminated at a whooping US$ 44.7 billion by June 30, 2022. Similarly, current account deficit swelled to US$ 13 billion in the first three quarters of fiscal year (FY) 2022 and closed at an indefensible level of US$ 17.4 billion. At the same time, the PTI government was recklessly borrowing throughout its tenure [August 2018—April 2022]. Resultantly, Pakistan’s total external debt, which was US$ 95 billion on June 30, 2018, peaked to US$ 130 billion by June 30, 2022.
Our vulnerable economy, already exposed to serious foreign exchange issues, high level of external debts without proper planning and optimum utilization, can face severe challenges in the coming years. The high current account deficit, minimal forex reserves leading to liquidity snags and diluting local currency strength have pushed Pakistan to a vicious circle—our inflows from exports, remittances and foreign direct investments are inadequate to meet the needs of import and external debt related outflows. Consequently, the present government of Pakistan Democratic Movement (PDM) is left with no other option but to resort to further borrowings.
A growing economy running a high fiscal deficit needs to refinance its maturing debt and also raise additional debt to meet the fiscal deficit. High levels of short-term debt poses severe refinancing challenges, especially during a slow economic growth, higher fiscal deficit, and/or lower investors’ confidence. For meeting the objective of financial discipline and streamlining our external borrowing, the Ministry of Finance (MoF) has set a benchmark limit vis-à-vis average time to maturity of 6.5 years for external debts. The Average Time to Maturity (ATM) for FY 2022 was adjusted to 7 years, but as per the Annual Debt Review [“the Review”] issued by MoF for FY 21-22, ATM of external debt declined sharply from 6.8 years in 2020-21 to 6.2 years in 2021-22. This shows that it stood below the target of 7 years and also below the benchmark floor of 6.5 years. The Review confirms that in recent years, the government borrowed significant amounts by raising debt from commercial sources including medium to long-term Eurobonds, and short-term bank loans.
Eurobonds mostly consist of 5-and-10-year tenures and bank loans typically have maturities of one year. Most of the bilateral loans obtained lately were/are of relatively shorter maturities. Our gross financing needs for FY 2023 are estimated to be above US$ 30 billion. PTI’s unwise borrowing spree in conjunction with the breach of staff level agreement with International Monetary Fund (IMF), proved to be a perfect recipe for disaster. Additionally, the undiplomatic handling of cordial relations with Kingdom of Saudi Arabia and Peoples Republic of China added fuel to fire. The PTI team thus placed multiple economic landmines for the incoming coalition government of PDM.
The estimate of gross financial needs of US$ 30 billion is based on the most critical assumption of curtailment of current account deficit of US$ 9.2 billion, around 46% lower than FY 22. The present government has been making relentless efforts to curtail the current account deficit. It has taken numerous administrative measures, including imposition of 100% non-remunerative Cash Margin Requirements (CMR) on the import of certain items. It was relaxed in August 2022 in cases where the credit terms of import were of more than 90 days.
The BPRD Circular Letter No. 25 of 2022 issued in August 2022 revised the percentage to 25% where import payment terms were 91 to 180 days and for above 181 days, the CMR was scaled down to 0%. The government also made mandatory payment authorization from State Bank of Pakistan (SBP) before initiating transactions for import of certain goods. Business houses have been alleging that approval is granted in a discretionary manner. Now through EPD Circular Letter No. 20 of 2022 dated December 27, 2022, SBP has withdrawn instructions to seek prior permission from Foreign Exchange Operations Department [SBP-BSC] before initiating any import transaction. It has further instructed that the requests for import transactions already submitted to SBP-BSC shall stand returned to the Authorized Dealers for appropriate disposal at their end. These import restrictions, imposed earlier, were in contravention of IMF’s agreement but Pakistan was left with no option for managing its fast depleting exchange reserves. During July to November 2022, current account deficit (CAD) nose-dived to US$ 3 billion as compared to US$ 7.23 billion for similar period of previous year, which is a significant and notable improvement of 57% but considering the recent floods which have adversely impacted the cotton and other crops, we may witness substantial reduction in export. Similarly, our import bill of staples and other commodities is expected to soar up. In this situation, it would be an uphill task for the authorities to curtail CAD to the committed level.
The government has been making efforts to successfully complete the Ninth Review by IMF and has gradually started moving towards completion of performance criteria agreed earlier. The news of disruption and delays in IMF programme has already jolted exchange markets further shaking the already dwindling business confidence. However, in severe economic conditions, Pakistan’s Finance Minister, Ishaq Dar is confident about resumption of the IMF programme. He is also optimistic about correcting the direction of the economy and taking it out from the danger zone. Let us hope that 2023 brings for all countrymen good news on economic and political fronts.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions