Default, then?
22 February 2024
Published in: Business Recorder
Fitch’s doubts about securing a post-SBA (Stand-By Arrangement) IMF lifeline show that even leading IFIs (international financial institutions) understand how the political paralysis following the election is already threatening to compromise the country’s very survival. Without one, Pakistan’s external debt repayment obligations – $75-85b over 2-3 years – will not be rolled over and it will certainly default.
And if the latest headlines about the latest PPP-PML-N huddle can be trusted – always a longshot these days – then “we, the people” can count on Nawaz Sharif’s brother to wear the crown of thorns and sacrifice more of PML-N’s siyasat to save the riyasat, not Ayub Khan’s grandson to deliver haqiqi azadi and guide Riyasat-e-Medina to Fatah-e-Makkah; none of which will do anything about the “external liquidity stress” that Fitch talked about.
The rating agency duly pointed out that “the current SBA is an interim package and we believe any successor arrangement would come with tougher conditions, which may be resisted by entrenched vested interests in Pakistan”. Those “vested interests” are powerful feudal lords and real estate and retail mafias that are “entrenched” in all parties, “looters of the people’s mandate” and “deliverers of real freedom” alike, that will never be included in the tax net no matter how pressing the existential threat. So, much darker days lie ahead for ordinary people who are left, as usual, to face much higher taxes in the name of harsh structural reforms to keep the treasury solvent.
But why didn’t any party talk about this dilemma before or after the election? It seems the only thing all of them have in common is the firm belief that they must head the new government for everything to fall in place. Now there’s so much political noise that even the market, which ordinarily would have gone into a tailspin after Fitch’s warning, reversed overnight losses as investors “went cherry-picking” on Monday, stayed “flat amid dearth of triggers” on Tuesday, and jumped a thousand-plus points on the slightest hint of a coalition government on Wednesday.
Fitch also mentioned the D-word, saying in no uncertain terms that “an extended negotiation or failure to secure it would… raise the probability of default”. And since its main concern was that a weak coalition government would struggle to meet IMF’s demands, and it’s already certain that the opposition would give the government its toughest time during these negotiations, it’s also clear that the endless bickering among the political elite is the biggest part of the problem.
Perhaps a little reverse engineering will help make sense of this circus.
The charter of economy (CoE) was first proposed when PTI was in power. That’s when IMF started insisting on “upfront conditions” and halting disbursements when they were violated. Back then it was still possible to get everybody on board, explain the gravity of the crisis to the people, reduce uncertainty, perhaps even start taxing the big fish that have been eating off the fat of the land since forever.
But PTI refused. Then it threw a fit when the same establishment that helped throw out the previous government and bring it to power refused to save it from the no-confidence motion and allowed all the turncoats that built the PTI administration to also deliver it the kiss of death by returning to their old parties. That stoked more uncertainty and controversy, suspended the EFF (Extended Fund Facility), triggered a crisis of confidence in the economy and an epic collapse of the rupee, unleashed unprecedented inflation and record high interest rates, and “we, the people” suffered more, as usual, for it.
Then, after Ishaq Dar’s blunders rubbished the EFF and the SBA was secured just in time to avoid default, there were still no takers for the CoE and the PTI versus the rest fight was cleverly drenched in religious colours; a proper “good vs evil” crusade. Then came the establishment’s very predictable crackdown on PTI, the equally predictable controversial election, and the split mandate and disputed results that everybody was expecting in a country where all losers always cry foul after every election.
And now there’s no chance of declaring an economic emergency and everybody working together in the largest interest of the country and its people. Instead, regardless of who forms government and how, you can be sure that the opposition will grill it and coalition partners will run for cover when the going gets very tough as negotiations for a new IMF programme begin sometime in April. It’s as if they are not concerned, or don’t even know, that their obsession with demeaning the other and coming out on top will mean only one thing.
Unraveling of the bailout trajectory, imposition of the repayment schedule, and sovereign default.
