Sunday, June 10, 2018

Pakistan on the Brink: From Mr. 10% to Mr. $100B?

During his time as first gentleman to then-President Benazir Bhutto, new Pakistani President Asif Zardari was dogged by accusations of corruption. Because of this alleged fondness for kickbacks on government contracts, he was called "Mr. Ten Percent" by his critics. Once more, I do not believe that I am in a good position to ascertain the veracity of these claims. However, a more recent action of his has given me reason to pause. Like in the past, it involves Mr. Zaradari and money. A lot of money.

Standard and Poor's downgraded Pakistan's sovereign credit rating to CCC+ from B on Monday:
Pakistan's credit rating was cut by Standard & Poor's, which doubts about the country's ability to meet $3 billion in debt-servicing costs as terrorism risks grow and investors flee emerging markets.

The nation's long-term foreign-currency rating was cut two levels to CCC+ from B, with a negative outlook, the U.S. rating company said in a report today. The rating may be lowered further if the government fails to stop the growing external imbalances, the report said...

``It is not a good sign for future foreign inflows,'' said Muzzammil Aslam, an economist at KASB Securities Ltd. in Karachi. ``This will halt efforts by Pakistan to raise funds from international financial markets and it will have to seek funds from bilateral or multilateral lenders.''

Pakistan is the world's riskiest government borrower, according to credit-default swap prices from CMA Datavision, with investors concerned by a deterioration in security that saw 53 people killed in a bomb attack on the Islamabad Marriott hotel last month.

``The negative outlook reflects our expectation that multilateral and bilateral aid, including deferred oil payment schemes, may not be timely enough,'' S&P said in the statement...Pakistan is running short of money to repay state debt. Its foreign-exchange reserves have dropped 67 percent in the past year to about $4.7 billion, S&P estimated.

Pakistan's next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note.
The Daily Telegraph further suggests that after subtracting the country's forthcoming liabilities, Pakistan's reserves amount to closer to $3 billion:
Officially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion - enough to buy about 30 days of imports like oil and food. Nine months ago, Pakistan had $16 bn in the coffers.

The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy...

While Mr Musharraf's prime minister, Shaukat Aziz, frequently likened Pakistan to a "Tiger economy", the former government left an economy on the brink of ruin without any durable base.

The Pakistan rupee has lost more than 21 per cent of its value so far this year and inflation now runs at 25 per cent. The rise in world prices has driven up Pakistan's food and oil bill by a third since 2007.

Efforts to defer payment for 100,000 barrels of oil supplied every day by Saudi Arabia have not yet yielded results, while the government has also failed to raise loans on favourable terms from "friendly countries".
Therefore, like Iceland, Pakistan is on the brink of a balance of payments crisis. Like other stories in this genre, the elements are similar: Foreign investors are flooding out of the country as the investment climate deteriorates (especially the law and order situation). In turn, foreign capital fleeing the country puts pressure on the country's foreign exchange reserves. Fears of an impending BOP crisis has caused the currency, the Pakistani rupee, to decline steadily [see chart above]. In the past, we all knew how stories like this would end: with a bailout package from the IMF. Like with the Iceland case, however, Pakistan seems keen on staving off an IMF package. Since the Asian financial crisis, many developing countries have accumulated massive reserves to avoid having to turn to the IMF and the perceived harshness of its conditionalities. These are quite unpopular, especially those involving "belt-tightening" measures (more on this later). Unfortunately for Pakistan, it is not one of the LDCs which have built up sizable reserves.

Instead of borrowing from the IMF to tide Pakistan over, then, what's Zardari's financial strategy? A Wall Street Journal interview with the man had him saying that the international community should give Pakistan a grant--not a loan--of $100 billion. My reaction is the obvious one: given his checkered history, why exactly should others entrust this fellow to administer $100B? We can debate all day about the past allegations of corruption leveled against him, but there is certainly no available evidence that he is capable of using such a huge amount wisely.

I have met so many talented and intelligent people from Pakistan that it disturbs me that this country is left with such a fate. Involvement with America's war on terror certainly has not benefited the country a whole lot. Nevertheless, asking a lot of money primarily to wage a Bushian war on terror seems the wrong way to go:
Mr. Zardari seems to hope that, with the intelligence problem out of the way, a new era of cooperation can open up with the U.S. "We want to be able to share [U.S.] intelligence," he says. "We need helicopters, we need night goggles, we need equipment of that sort." He stresses the need for precision and finesse in fighting Islamic militants, rather than large-scale military force. "My eventual concept is that we should be taking them on as they are, as criminals." Of Osama bin Laden he says, "the minute I make anybody my enemy, he becomes as big as I am."

In recent weeks there have been reports that Pakistan has deployed F-16s against tribal insurgents, in part because the army's own frontier troops have been routinely routed in ground fighting. Their problems aren't simply tactical. "What kind of a joke is this that I cannot pay my security personnel more than the Talibs are paying?" he asks. "Those terrorists are paying their soldiers 10,000 rupees; I'm paying seven or six thousand rupees..."
It's a classic chicken-or-egg situation: would so-far elusive economic progress in Pakistan make less turn to the Taliban and its likes, or would economic progress come more as the result of fixing the insurgency situation first? I subscribe to the notion that addressing situations that breed instability and discontent such as a lack of viable economic alternatives comes first. See Somalia and Afghanistan, for instance. Zardari says:
Speaking of the attack, Mr. Zardari again brings the subject around to his economic problem. "If I can't pay my own oil bill, how am I going to increase my police?" he asks. "The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful."
Is this the man the world should give $100B to in grants, never to be repaid? Read the WSJ interview. His plea is reprinted here:
Mr. Zardari shows no signs that he is stepping into that role diffidently. In an interview last Saturday with The Wall Street Journal, held under tight security at a midtown Manhattan hotel, he crafted his phrases in a tone of command. Pakistan's war, he says, is "my war," its fighter jets "my F-16s," its Intelligence Bureau "my IB." When he discusses Pakistan's economic crisis -- the central bank has about two months' worth of foreign currency reserves left to pay for the country's imports of oil and food -- he says he looks to the world to "give me $100 billion..."

"I need your help," he says more than once. "If we fall, if we can't do it, you can't do it." In asking for the help -- and $100 billion is no small request, even (or particularly) in the age of AIG -- Mr. Zardari is keen to insist that it not be described as aid. "Aid is proven through the researches of the World Bank . . . [to be] bad for a country," he says. "I'm looking for temporary relief for my budgetary support and cash for my treasury which does not need to be spent by me. It is not something I want to spend. But [it] will stop the [outflow] of my capital every time there is a bomb. . . . In this situation, how do I create capital confidence, how do I create businessmen's confidence?"
10/9 UPDATE: Pakistan has now lowered bank reserve requirements in a bid to improve domestic liquidity. Also, its central bank has been intervening to try and prop up the rupee. Are they trying to forestall the inevitable? We'll find out soon enough.

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