It’s pretty clear that the PTI (Pakistan Tehreek-e-Insaf) government will not stop agitating for an early election, because it’s sure to win it. And the PDM (Pakistan Democratic Movement) government will keep delaying it, because it’s sure to lose it. And the economic certainty from this political impasse is hurting the country’s credit rating and spiking credit default swaps (CDS) on its five-year sovereign debt to the untenable 70-90pc range – forcing even friendly lender-of-last-resort countries away from committing serious money here any longer.
If that weren’t enough, talks for next tranche of the EFF (Extended Fund Facility) have been called off indefinitely, so the little foreign exchange that was trickling in, providing desperate support to the fragile, $7-odd-billion reserves position is also in doubt. And also further lending from other bi- and multi-lateral donors that take cue from the IMF (International Monetary Fund). Let’s not forget that the country must make $32-35b in debt and interest payment in this fiscal, about five times the national reserves, with not nearly enough exogenous support in sight for the first time.
So, how far can we really be from default?
PTI played it up, typically, when CDS suddenly jumped last week, the market’s blunt dismissal of PML-N’s Darnomics experiment amid an investor rush to safety from currency and equity markets. And the finance minister played it down, quite naturally, getting the SBP (State Bank of Pakistan) governor to move in lockstep with the ministry, like the old days, and join the all-is-well chorus as well. That leaves the people with no option but to interpret the country’s financial health according to their political leaning. PML-N supporters say that the economy is on the brink of ruin because of PTI’s antics yet, fortunately, their people are in power so we will manage to stay afloat. PTI walas, on the other hand, are convinced that the “imported government” bit off more than it could chew when it sided with the “foreign conspiracy” to unseat their government, and now it is ruining the economy.
The truth, however, is that default had appeared on the radar about half-way into the PTI government; like the wolf at the door that refuses to go away. And CDS would have waved a red flag sooner or later even if PTI had stayed in power; as the time for bulk payments came near, especially if the political atmosphere became toxic. Remember how IMF flatly rejected Shaukat Tarin’s expansionist budget, right in the middle of the EFF’s strict structural adjustment, and soon enough the subsidies and tax breaks had to be rolled back in a mini budget?
That’s also when Saudis and other friends tied their support to continuation of the bailout programme. And one reason the rupee, investor sentiment, and also reserves plummeted after Imran Khan famously froze petrol and electricity prices in the dying days of his government was that the IMF and friendly country aid pulled out; just as they had warned. But instead of urgent introspection to weigh options and save the economy, it filled the headlines with yet more toxicity, with government and opposition blaming each other for the mess.
Just like now, when the entire nation, especially the political elite, is consumed by the appointment of the army chief, even though whoever is promoted, or retained, will not be able to do a thing about the country’s most urgent problem. That, of course, is to bend over backwards and get about $20-30b in debt rolled over urgently, otherwise there’ll be no option but to beg, borrow or steal that much money to avoid a very, very hard landing. And even if either of those things can be done, it will only delay the inevitable because soon enough there’ll not only be similar amounts to pay back, but also more foreign aid needed just to function.
It might have helped if all stakeholders had joined heads, put their differences aside, and agreed on a one-point agenda of rescuing the economy. But with PTI bent upon forcing an early election, and PDM equally committed to stalling it, the country is simply sleepwalking into default.
As the owner of a large brokerage house put it when asked to weigh the chance of default not long ago, “There was a time when you were certain that Pakistan could be kept from defaulting, but now you’ve got to ask ‘at what cost’.”
Copyright Business Recorder, 2022