AROUND a month ago, the UK newspaper Financial Times (FT) did a story on Pakistan’s economic performance and how the reality seemingly differed from the IMF’s “rosy view”. I had been quoted as saying the rise in foreign exchange reserves since the start of the Fund programme “was a bit like a Ponzi scheme”, meaning that the government was raising high-cost debt to pay off the IMF and previous loans, and would then need to raise even more expensive debt later to retire the obligations it was so happily — and wantonly — raising now. (I should have added: this was an IMF-approved Ponzi scheme).
Within a few days, the ministry of finance had issued a high-sounding rebuttal to the FT, stating that independent economists and commentators did not have access to the data the government did, and therefore had made unfounded assertions in the piece.
Almost exactly a month later, Pakistan was in the international capital markets, looking to raise $1 billion via a Eurobond issue. With total forex reserves at over $18bn, why it needed to be in the bond market when global conditions for issuers are challenging, is something that has been left unexplained. A combination of jitters about the timing of the so-called lift-off in US interest rates, and the health of the world economy, specifically of emerging markets (EM), after the severe slowdown in China, has prompted outflows of over $40bn from EM assets between July and end-September. Many planned bond issues by EM borrowers have been deferred since the spike in uncertainty in the financial markets.
In the event, Pakistan raised $500 million for 10 years at a coupon of 8.25pc — 617 basis points higher than the yield on the equivalent US Treasury bond. In comparison, a similar 10-year Eurobond was issued by Pakistan in 2006 at a spread of 270 basis points.
If the Ministry of Finance had decided to raise $1bn, it would have had to offer a coupon of well over 9pc. Rounding off the failure of the issue was the fact that, according to knowledgeable market sources, around 80pc was picked up by the offshore units of Pakistani financial institutions due to lack of demand.
Far more disastrous than the frosty reception to the bond by foreign investors, is what our economic team communicated to the world. At the bond road shows, the highest official of the Ministry of Finance had this to say:
Pakistan was issuing the current bond to repay a maturing similar-sized bond in March 2016.
Pakistan will keep its options open regarding a follow-up IMF programme.
The inappropriate communication from the Ministry of Finance confirmed and reinforced the worst fears of most observers regarding the state of Pakistan’s economy: that by requiring new loans to pay off maturing ones, it is indeed sinking into a debt trap, if not already there; and secondly, that even with a ‘successful’ completion of the current IMF programme, there is considerable uncertainty about meeting the underlying reform objectives.
(As an aside, I find it depressing and demeaning as a Pakistani to see how our bureaucrats and politicians wantonly, routinely and brazenly lie to the citizens of this country without a care, but are forced to be honest against their grain in front of foreign audiences.)
The fiasco of the latest Eurobond issue is instructive of how the PML-N government is managing the economy (or not), what economic targets it is pursuing, and how those targets are completely divorced from the economic objectives we should be pursuing. For example, a key target appears to be to reach $20bn in total foreign exchange reserves before December-end. If one were to ignore the ‘why’ and focus on the ‘how’ it is clear that new borrowing, at mainly commercial rates, is the preferred mode, rather than a focus on boosting Pakistan’s flagging exports. Bangladesh, on the other hand, has seen its forex reserves cross $30bn, with exports of $27bn providing the main support.
Another target being followed is to increase tax revenue. While some path-breaking measures have been taken, the bulk of the increase in FBR revenue collection has come from an increase in tax rates, the withholding of refunds, and the introduction of multiple new taxes on existing taxpayers. This is hurting the business environment and stopping new investment in the economy. It will also prove detrimental to efforts to increasing tax revenue in the long run — the exact opposite of what Pakistan should be aiming for.
A third objective is ostensibly to ‘resolve the power crisis’. How is the PML-N government hoping to achieve this? By pursuing dubious, shady and non-transparent energy deals like LNG, and expensive new power generation projects such as Nandipur and the Solar Park. By failing to implement meaningful reforms in the sector — such as improving governance and reducing theft by collusion of insiders, and instead by focusing on high-cost ‘solutions’, the government is actually laying the basis for a more prolonged and severe power crisis well into the medium term.
Similarly, all-important goals of increasing exports, or reducing the debt burden, are either being completely ignored, or being made worse by mismanagement and lack of planning.
An intriguing question is: with Pakistan’s economy so clearly adrift, where is the prime minister, and why is he not providing leadership on the economy? At a time when his counterpart in India is wooing the world, casting himself as a ‘transformative’ leader for his country, and attracting commitments of billions of US dollars, Nawaz Sharif is appearing disoriented, divorced from reality and desultory.
Without the prime minister stepping up, taking firm charge and being counted, the economy will drift further under the current manner of management.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
Adrift without a plan |Sakib Sherani
Published in Dawn October 2nd, 2015