Pakistan’s economic crisis is only deepening.
On Thursday, Islamabad received a double whammy from the International Monetary Fund – which not only predicted a slowdown in the Gross Domestic Product (GDP) from 3.5 per cent to two per cent for the current fiscal, but also rejected Pakistan’s revised Circular Debt Management Plan (CDMP).
This, as its foreign reserves further even fell to $3.2 billion – to around three weeks of imports – its rupee kept falling in January, power outrages left millions in the dark, a food crisis intensified and debt obligation remained dangling over its head.
Let’s take a closer look at Islamabad’s growing troubles and if it will go the Sri Lanka way:
IMF’s double whammy
The IMF team, which arrived in Islamabad led by Mission Chief to Pakistan Nathen Porter on Monday to negotiate the terms of its bailout, has ended in failure.
As per Indian Express, Pakistan has approached the IMF on no less than 23 separate occasions since 1958 – the most by any nation in that period.
The IMF on Thursday rejected Pakistan’s revised CDPM as “unrealistic” and said they were made on the basis of incorrect assumptions.
Circular debt occurs when one entity facing problems with its cash inflows does not make payments to its suppliers and creditors.
The revised CDMP called for an increase in the circular debt to the tune of ₹ 952 billion for the current fiscal year against an earlier projection of ₹ 1,526 billion. The Pakistan government shared its revised CDMP with the IMF high-ups on Wednesday.
The Pakistan government’s revised CDMP demonstrated that the government needed an additional subsidy of ₹ 675 billion despite increasing the power tariff in the range of PKR 7 per unit through quarterly tariff adjustment in the first two quarters of 2023 and PKR 1.64 for the third quarter from June to August.
The IMF also raised questions on how the Pakistan government calculated its additional subsidy requirement figure of ₹ 675 billion for the current fiscal year, according to The News International report. The revised CDMP envisages restricting losses of DISCOs to 16.27 per cent on average during the current fiscal year.
According to the report, the Pakistan government has envisaged the target to recover Fuel Price Adjustment (FPA) charges deferred last summer to fetch ₹ 20 billion against estimates of ₹ 65 billion made last summer, as per the news report.
The IMF delivered Pakistan a double-whammy on Thursday.
The markup saving due to IPPs stock payment will bring PKR 11 billion and the GST as well as other taxes on a collection basis will help recover PKR 18 billion in the current fiscal year, according to The News International The circular debt is estimated to be around PKR 2,113 billion until the end of Fiscal Year 2023, including the amount parked in the Power Holding Limited (PHL).
The Pakistan government will have to make changes in its policy prescription to restrict the losses of the power sector, according to The News International.
The IMF urged the Pakistan government to increase the electricity tariff in the range of Pakistani Rupees (PKR) 11-12.50 per unit to restrict the additional subsidy at PKR 335 billion for the current fiscal year.
“The IMF has opposed the certain basis of the revised CDMP and asks the government to raise the tariff in the range of ₹ 11 to ₹ 12.50 per unit, so that the requirement of additional subsidy could be reduced to half from its existing levels of ₹ 675 billion for the current fiscal year,” The News International quoted top official sources as saying.
Graphic: Pranay Bhardwaj
Talks between both sides to finish the pending ninth review under the $7 billion Extended Fund Facility (EFF) are expected to continue.
But, as the Indian Express piece noted, the IMF’s programme has been held-up since November on account of finance minister Ishaq Dar not agreeing to its demands to address the growing fiscal deficit and stick to a market-determined exchange rate.
Former prime minister Imran Khan, who was ousted last year in a no-confidence motion, negotiated a multi-billion-dollar loan package from the IMF in 2019.
But he reneged on promises to cut subsidies and market interventions that had cushioned the cost-of-living crisis, causing the programme to stall.
The IMF and Pakistan’s Ministry of Defence will work out a gap on the fiscal front after which various additional taxation measures will be finalised through the upcoming mini-budget.
The International Monetary Fund also projected a slowdown in the Gross Domestic Product (GDP) from 3.5 per cent to 2 per cent for the current fiscal.
According to the Pakistan daily, the IMF had also projected that the GDP growth rate would rebound in the next fiscal 2023-24 up to 4.4 per cent.
Global growth is projected to fall from an estimated 3.4 per cent in 2022 to 2.9 per cent in 2023, then rise to 3.1 per cent in 2024, according to IMF’s World Economic Outlook (WEO) released on Tuesday.
The rise in central bank rates to fight inflation and Russia’s war in Ukraine continue to weigh on economic activity. The rapid spread of Covid-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than-expected recovery, reported The News International.
Global inflation is expected to fall from 8.8 per cent in 2022 to 6.6 per cent in 2023 and 4.3 per cent in 2024, still above pre-pandemic (2017-19) levels of about 3.5 per cent. The balance of risks remains tilted to the downside, but adverse risks have moderated since the October 2022 WEO.
On Tuesday, Pierre-Olivier Gourinchas, the chief economist of the IMF, said Pakistan is going to slow down, and that’s partly the end of the stimulus from fiscal policy in 2022, according to the statement released on IMF’s website.
Responding to a query regarding the bailout program negotiations with Pakistan, Gourinchas said, “Pakistan’s economy is coming out of a very strong 2022 with 6 per cent growth, well above the world average. But in 2023, there will be a slowdown, and that’s partly the end of the stimulus from fiscal policy in 2022. That’s going away. And also because of the high inflation, the central bank has increased interest rates, which we see as an appropriate step, 17 per cent recently, the interest rates.”
“That’s going to cool domestic demand. And so we see a growth of 2 per cent in 2023. Unfortunately, we also had to downgrade the forecast growth for Pakistan by one and a half percentage points for 2023. And that’s because of the floods, which was a terrible supply shock, both reducing activity, but also raising inflation and putting various pressures on the country. Inflation, therefore, went up because of this. We see inflation reaching about 21 per cent in 2023. This is also because of the exchange rate depreciation,” he further stated.
Worse, Islamabad seems to be at odds with Beijing.
As this Moneylife piece noted, “… things are looking very grim and, one by one, the doors are shutting. The ‘true friend’ (whose friendship is taller than mountains, deeper than oceans, sweeter than honey) has walked away after losing over US$30 billion.”
“Big brother’ is not giving the nod for the payout of yet another tranche of loan,” the piece added.
The Indian Express piece noted that Beijing is Islamabad’s biggest bilateral creditor.
It holds around $30 billion of Pakistan’s debt – around 30 per cent of its external debt overall.
China is Pakistan’s biggest bilateral creditor. AP
The piece noted that Pakistan has agreed to pay over a billion dollars to China in installments but that this may have cheesed off the IMF.
Worse, Islamabad’s attempts at renegotiating fell flat with Beijing.
“Rescheduling debts can provide some relief but who will bite the bullet first? The Chinese or the international financial institutions that are owed $41 billion?” the piece queried.
Foreign exchange, inflation, food, energy crises
Pakistan’s foreign reverses, which were at around $3.67 billion the week ending 20 January, have fallen even further to $3.2 billion.
The State Bank of Pakistan (SBP) in a statement last week blamed “external debt repayments” for the fall.
The central bank pegged net foreign reserves held by commercial banks at $5.77 billion and total liquid foreign reserves at $9.45 billion.
Pakistan has also been gripped by an inflation, food and energy crisis – and is staring at a fuel shortage.
Inflation has now touched a 48-year high, according to data released on Wednesday by the country’s statistics bureau.
Year-on-year inflation in January 2023 was recorded at 27.55 per cent, the highest since May 1975, with thousands of containers of imports held up at Karachi port.
Graphic: Pranay Bhardwaj
In downtown Karachi on Monday, dozens of day labourers including carpenters and painters waited with their tools on display for work that never comes.
“The number of beggars has increased and the number of labourers has decreased,” said 55-year-old mason Zafar Iqbal, who was eating biryani from a plastic bag donated by a passer-by.
“Inflation is so high that one cannot earn enough.”
The National Consumer Price Index for January 2023 rose by 2.88 per cent from the previous month, the figures released on Wednesday showed.
According to Hindustan Times, inflation in January was at an eyewatering 28.7 per cent for food and non-food items.
That figure stood at 24.5 per cent in December 2022 and 12.3 per cent in December 2021, as per Yahoo News.
Onion prices are an incredible 501 per cent higher than last year, while rice, wheat, pulses, and salt are 50 per cent more costly over the same period.
Pakhtunkhwa, Sindh, and Balochistan provinces witnessed stampedes for grain and flour, as per the report.
Meanwhile, Balochistan’s food minister Zamarak Achakzai warned that subsidised flour stocks have run out.
Financial Express reported that with Lahore facing a scarcity of flour, a 15 kilogramme bag sold for Rs 2050.
Meanwhile, the price of sugar and ghee, sold through the Utility Stores Corporation,skyrocketed from 25 to 62 per cent, according to the newspaper Dawn.
Pakistan has been facing energy woes for months. AP
On 23 January, the entire country of Pakistan lost power for more than 15 hours, as per Dawn.
This, despite Pakistan’s government ordering all malls and markets to close by 8:30 pm among other measures to conserve energy.
The newspaper noted that this was unusual coming after it did just months after an October blackout – and occurred in winter when demand is more than halved than that of summer.
The piece noted that though the government attempted to minimise the blackout, it was possibly the worst-ever crisis in the history of the country’s energy grid.
“There is a lot that we don’t know about what happened on January 23. The government should conduct a thorough inquiry and publish it so it does not happen again,” the piece noted.
Defence minister Khawaja Asif told in January journalists the cabinet-approved measures to shut markets, including restaurants, aimed to save the cash-strapped country about Rs 62 billion.
He said additional immediate measures included shutting wedding halls by 10 pm daily.
He added that some market representatives had pushed for longer hours, but the government decided that earlier closure was needed.
Asif further said the prime minister had ordered all government departments to reduce electricity consumption by 30 per cent.
Asif said the energy conservation plan also included banning the production of energy-inefficient bulbs and fans from February and July respectively.
He added Pakistan’s peak summer electricity usage was 29,000 megawatts (MW) compared with 12,000 MW in the winter, mainly due to the use of fans in hotter months.
Half of the street lights across the country will remain switched off as a “symbolic” gesture, the minister said.
Most of Pakistan’s electricity is produced using imported fossil fuels, including liquefied natural gas, prices of which have sky-rocketed over recent months.
Meanwhile, Pakistan could face a crunch in fuel supplies in February as banks have stopped financing and facilitating payments for imports due to depleting foreign exchange reserves, traders and industry sources told Reuters.
Pakistan typically meets more than a third of its annual power demand using imported natural gas, prices for which shot up following Russia’s invasion of Ukraine.
“There is no shortage this fortnight. If we don’t have LCs (letters of credit) open right now, we might see shortages in the next fortnight,” a senior official at one of the oil companies told Reuters.
A letter of credit issued by the importer’s banks is a standard form of payment guarantee in the oil trade to the exporter.
Oil traders, however, are shunning countries such as Pakistan and Sri Lanka due to an acute shortfall of foreign exchange. Pakistan on Sunday raised petrol and diesel prices by 16% to 249.80 Pakistani rupees ($0.9373) a litre and is in talks with the IMF to unlock a suspended bailout package.
State-owned refiner Pakistan State Oil (PSO) and Pakistan LNG Ltd have left a flurry of fuel tenders unawarded in the last couple of months.
At an industry meeting on financial challenges faced by fuel importers, State Bank of Pakistan officials cited “severe liquidity issues” faced by the country for delays in the opening of LCs, according to a Jan. 19 letter from Imran Ahmed, director general of oil, reviewed by Reuters.
At the same meeting, the managing director of PSO said a gasoline cargo due for loading on Jan. 13 has already been cancelled due to the non-opening of LCs. “He added that the country is having limited stocks and such a situation can lead to dry out,” according to the letter.
Previously, the Oil Companies Advisory Council (OCAC), representing Pakistan’s refining, pipeline, and marketing companies, also flagged that delays in the opening of LCs could “lead to a fuel shortage in the country”.
In a Jan. 13 letter to the Ministry of Finance, OCAC said Pakistan needs to import around 430,000 tonnes of gasoline, 200,000 tonnes of diesel, and 650,000 tonnes of crude oil every month, costing $1.3 billion to meet local demand.
“If LCs are not established on a timely basis, critical imports of petroleum products would be impacted which may lead to a fuel shortage in the country,” the OCAC said.
Pakistan bought only 223,000 tonnes of gasoline in December versus 608,000 tonnes in the same period a year earlier, data from Kpler showed. In January this year, the country was projected to import 270,000 tonnes of the fuel, compared with 393,000 tonnes in the same month in 2022, the data showed.
Some banks have denied delays in issues of LCs, while SBP did not respond to a Reuters email seeking comment.
“If there are no issues with LCs in Pakistan then why was the SBP (State Bank of Pakistan) and sector been holding meetings all of last week?,” a senior official from one of the oil companies said.
PSO said last week it was ensuring a seamless supply of gasoline and gasoil across the country and had ample stocks.
It also said its import cargoes were arriving smoothly as planned.
As per Reuters, Pakistan will be hard-pressed to meet external financing needs of over $30 billion up until June 2023, including debt repayments and energy imports.
As this piece in Nikkei Asia posited, concerns are growing that Pakistan could follow in Sri Lanka’s footsteps.
“While the country is now politically polarised between supporters of the government and backers of Imran Khan, who was ousted as prime minister last year, the major parties must recognize that Pakistan is in an emergency that requires them to set aside their personal feuds or risk the country sliding into the kind of financial collapse that saw food and fuel disappear for many Sri Lankans last year,” the column noted.
This, as Financial Express quoted World Bank as saying Pakistan’s GDP growth will be at just 2 per cent while its external debt stood at $130.433 billion in 2021.
The newspaper quoted State Bank of Pakistan Governor Jameel Ahmad as saying that Pakistan needs to cover $13 billion for the rest of the fiscal year.
The piece in the Nikkei Asia noted that Pakistan had looked to the IMF for support nearly two dozen times since 1958.
“It is time the fund and other lenders, instead of just repeating their regular formula of cash infusion, link their support to fundamental systemic changes that can help end Pakistan’s financial fragility,” the piece concluded.
The recriminations have already begun.
As a piece in The Tribune noted things did not have go unfold in this manner.
“We could have acted more responsibly. For instance, we could have been like Bangladesh, which had the foresight to approach the IMF for assistance early last year, at a time when their foreign exchange reserves were still north of $40 billion. But we chose to waver and deceive,” the piece noted.
The piece added that growth, employment and inflation would now suffer and that Pakistan’s international reputation has been severely diminished.
“It is this diminished reputation that enabled the international community’s lukewarm response to the very real tribulations unleashed by last summer’s catastrophic floods. We have only ourselves to blame,” the piece concluded.
Meanwhile, Sakariya Kareem in Asian Lite predicted that Pakistan is on the way to going ‘bankrupt’ and has “resumed its five decades-old practice of pleading for funds from other countries and fleecing the world’s kindness”.
According to the publication, since its independence in 1947, Pakistan has been fooling the Americans, Russians, Muslim countries, and now China into believing that their best interests would be served by funding Islamabad’s existence and regional misadventures.
Borrowing former Pakistan President Zulfikar Ali Bhutto’s quote, “We (Pakistan) will eat grass, even go hungry, but we will get one of our own (Atom bomb) … We have no other choice!”, the column stated that his words seemed to be ringing true as the country’s nuke count reached 165 but it is left with no food and electricity.
“Zulfikar Ali Bhutto’s stance is also symbolic of Pakistan’s priorities as a nation. Countries naturally grapple with the Guns Vs Butter dilemma whilst allocating their own hard-earned resources to their budgets. However, Pakistan appears to be faced with Guns Vs Terrorism conundrum whilst being eye-deep in debt and allocating resources begged or borrowed,” read the column in Asian Lite.
The butter aspect of this dilemma has somehow become the rest of the world’s problem, the column states, adding that nothing exemplifies this better than the way resources have been allocated in the recent Pakistani budget.
“Out of the PKR 9.579 trillion outlay, Defence Affairs and Services are pegged at PKR 1,566.698 billion. This is about 16.3 per cent of the total budget outlay, 1.94 per cent of GDP and a 14.1 per cent year-on-year increase. This, however, does not give the full picture of the actual amount being spent on the Armed Forces,” the piece further reads.
“Pakistan’s financial mismanagement and governance deficit are resulting in a preposterous situation wherein the government is asking all elements of economy and governance to shut down early in the day or work from home to save money and at the same time tendering out $257 Million worth of military procurements,” it added.
According to the author, Pakistan must be held accountable for what it is doing with the rest of humanity’s wealth.
“Pakistan has a proven track record of misappropriating resources from the needy to the greedy – the embezzlement of international relief aid during the 2010 floods is still fresh in global memory. It is imperative that the enlightened West apply its wisdom to the extant case and ensure that the bail-outs that they so generously provide help sustain the human indices of Pakistan and does not end up further militarising the region,” he wrote.
With inputs from agencies
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