A long-awaited IMF Staff Level Agreement (SLA) is finally reached. However, the anxiety – particularly in the currency and international sovereign bond markets – is not over yet. The reversal in yields is marginal to zero, which are still priced into the default range as the currency continues to move south. Investors and international creditors are not convinced of the return of stability to the Pakistani economy. Perhaps they establish a link between economic stability and political stability. They increasingly tag Pakistan with Sri Lanka. It’s not good. Perception has not improved.
Since the start of the vote of no confidence, Pakistani markets have remained bearish. And with the ousting of Imran Khan (IK), the politically charged public in urban and rural areas is making investors and friendly countries uncomfortable with Pakistan. As this article is published, the results of the Punjab by-elections are said to be known. Regardless of the results, stability may not return. If Pakistan Tehreek-e-Insaf (PTI) wins, the current configuration of the Pakistan Democratic Movement (PDM) would be in jeopardy. And if the Pakistan Muslim League-Nawaz (PML-N) succeeds, the PTI and IK will refuse to accept the results and political unrest will continue.
Consequently, things on the political front are not likely to calm down. And economic times are tough for people, even with the International Monetary Fund (IMF). IMF conditionalities are tougher this time around. The MEFP (Memorandum of Understanding of Economic and Financial Policies) is not yet public. However, sources have revealed that the targets are stricter than what was actually intended.
For example, the primary budget surplus was set at a higher level. The NFA (net foreign assets) and NDA (net domestic assets) targets have been tightened. The government probably needs to raise more foreign funding from friendly countries and markets to build up foreign exchange reserves. The financing of public debt will pose a challenge as well as the financing of balance of payments gaps. The Fund may watch more closely the intervention of the State Bank of Pakistan (SBP) in the foreign exchange market. And given the higher NFA target, SBP can refrain from intervening. This is probably the reason why Pak Rupee failed to appreciate despite IMF approval.
That said, it is unfair to blame domestic instability or IMF conditionalities. The world scenario is not helping Pakistan. Commodities are in a super cycle. The unraveling of the economic stimuli offered during the pandemic as well as the war in Ukraine have seriously undermined the debt sustainability of a few countries in financial difficulty. Some have defaulted (like Sri Lanka) and many more are on the verge of default (like Pakistan).
Global feelings are negative after Sri Lanka descended into political and economic chaos, but no “so-called” friendly country has come to its aid. The international financial communities compare Pakistan to this situation. The economic crisis in Sri Lanka has created unprecedented political chaos. Seeing the charged crowd and the negative feelings of the urban middle class against the incumbents – the government and the X, Y and Z – they fear that difficult economic conditions (inflation and possible energy and food shortages) could trigger a scenario similar to Pakistan. The fear grows. And the lenders keep their support at a distance when it comes to Pakistan.
Then, domestic sentiments worsened due to rising inflation and the inability of the incumbents to pull the economy out of the woods. The mantra built around ousting the PTI government was based on the supposed inability and incompetence of the PTI government to deal with economic challenges and was blamed on negotiating a bad deal with the IMF.
The PML-N leaders constructed the narrative that they could have gotten a better deal from the IMF and could have restored the confidence of international and domestic investors. The result is exactly the opposite. Economic difficulties have worsened in recent months. The IMF presents itself as a tougher lender. Friendly countries give nothing without the IMF. The currency slipped due to political instability, then the inability to pass on the impact of rising energy prices to consumers (for months) further weakened economic fundamentals. Now, tightening in the US and other developed economies would keep the PKR under pressure.
The political change was untimely. There was a momentum of economic and income growth. The most difficult measures could have been taken in time. The IMF would not have been delayed. And the situation might not be as bad as it is today. Yes, there would be inflation and soaring energy prices. But the growing risk of default and the comparisons with Sri Lanka could have been avoided.
Assigning blame for this mess is best left to the reader’s imagination. Nevertheless, some bubbles burst. PML-N’s alleged competence mantra and Shehbaz’s super-administrative perception erupt. Major media are exposed. The narrative built against the tough economic decisions made under the PTI stood in stark contrast to what the media portrays today – be it oil prices, LNG imports, inflation, the exchange rate , interest rates or any other economic decision or outcome. The whole system is exposed. Political myths explode.
It could be good in a way. But the country is not in good shape. It is extremely important to regain the confidence of investors to reverse the trend. For this, political stability is imperative. And the political scenario becomes chaotic with increasing economic woes for the masses in the form of inflation and loss of jobs. It is a difficult situation. One can pray that commodity prices will return to the mean. But it may take some time. And this moment is critical. The situation is more serious than ever. Hence the need to take all necessary measures to create greater political stability in the country.
Copyright Business Recorder, 2022