FeaturedNationalVOLUME 19 ISSUE # 15

Challenges and uncertainty after election

The aftermath of the 8 February elections in Pakistan has ushered in a period of heightened political uncertainty, significantly impacting the country’s creditworthiness.

This is evidenced by the decline in sovereign dollar bonds and the lack of upgrades from rating agencies since the initiation of the ongoing IMF loan program in June 2023. As the April 2024 bonds register the most substantial drop, concerns loom over the conclusion of the IMF program on April 12 and the anticipation of harsher conditions for the next loan.

Pakistan’s economic managers assert that they have successfully stabilized the economy, pointing to various positive indicators such as a decrease in the negativity of the large-scale manufacturing sector and a current account surplus resulting from import restrictions. However, this claim is met with skepticism from the general public, international rating agencies, and multilateral lenders.

Contrary to the government’s assertions, data reveals multiple challenges to economic stability. In January 2024, a deficit reappeared in the current account, amounting to $269 million, attributed in part to a widening trade deficit as exports fell and imports rose following the lifting of restrictions agreed upon with the International Monetary Fund (IMF). The apparent improvement in the productivity sectors is attributed to increased farm output and fiscal and monetary incentives directed at high-frequency indicators such as fertilizers, tractors, and cement.

Public concerns revolve around the weekly adjustments in household budgets, with a growing percentage of income allocated to food expenses, evident in the Sensitive Price Index’s year-on-year increase of 34.25 percent for the week ending February 15, 2024. The poverty rate remains high at 40 percent, and job opportunities are diminishing due to factory closures linked to escalating input costs. The government attributes these cost increases to administrative measures agreed upon under the ongoing IMF program, without acknowledging the substantial rise in domestic borrowing for current expenditure, which has reached levels for the first six months of the current year that surpass those of the entire previous year—a policy perceived as highly inflationary.

The IMF’s program relies on a two-pronged strategy: achieving full cost recovery, reflected in continually rising utility prices, and implementing structural adjustments deemed politically challenging but capable of enhancing governance, particularly in poorly performing sectors such as energy and taxation. However, these adjustments, crucial for precluding the necessity of raising utility charges or petroleum levies, have yet to be implemented.

Recent Federal Board of Revenue (FBR) reforms have focused on administrative changes rather than a substantial shift in the tax structure, such as increasing direct taxes based on the ability-to-pay principle to at least 40 percent by year-end, as opposed to the current imposition of withholding taxes in the sales tax mode.

Multilateral and bilateral entities remain cautious due to successive administrations favoring influential groups in budget allocations. The PPP-led government favored rental power project contracts opposed by an Asian Development Bank audit, the PML-N supported contracts contributing to the persistently high electricity prices, while the Khan administration favored the builders and construction sector.

Rating agencies focusing on Pakistan’s creditworthiness are taking into account the persistent political uncertainty following the 8 February elections. This concern is substantiated by the decline in Pakistan’s sovereign dollar bonds, which fell by as much as 1.25 cents since the elections. Notably, April 2024 bonds experienced the most significant drop, trading at 95.88 cents to the dollar, primarily attributed to the scheduled conclusion of the IMF program on 12 April. Fitch, in its report, anticipates the attainment of the next program loan within a few months but expects harsher conditions, deeming it critical to forestalling the looming threat of default.

In the current situation, no rating agency has upgraded Pakistan since the staff-level agreement on the ongoing loan program was reached on 29 June 2023. Furthermore, there was no upgrade after the completion of the first review on 15 November 2023, marking an unprecedented occurrence in Pakistan’s history of securing IMF loans.

Pakistan’s economy has reached a juncture where neither multilateral nor bilateral entities are willing to forecast improvement without the government fulfilling its commitments. Similarly, no rating agency is inclined to grant an upgrade without firsthand assessment of the on-the-ground situation.

The luxury of selectively fulfilling pledges that shift the burden onto consumers, reflecting a lack of empathy from administrations towards the people, is no longer tenable. It is hoped that the new government recognizes this reality as it engages in the second and final review, entering negotiations for the next program.

In a situation where economic improvements are contingent on government accountability and fulfillment of commitments, Pakistan finds itself at a critical juncture. The historical absence of upgrades post-IMF program reviews and the reluctance of international entities to project improvements highlight the imperative for genuine governance reforms. The days of passing the burden onto consumers without addressing systemic issues seem numbered. As the new government engages in the crucial second and final review and negotiates the terms for the next program, it is essential to recognize the pressing need for substantial changes that resonate with both international stakeholders and the Pakistani populace.