BLOG: Economy after Ishaq Dar

Though the official narrative is trying to paint a positive picture of the current state of Pakistan’s economy yet the underlying factors point out that the essential aspects of the economy are still critical and will take a long time to come out of woods.

The floods have pushed back the country’s economy by years and may crucially impair the economic essentials and may require extraordinary efforts to overcome these difficulties.

Only Dar factor will not be sufficient as has been widely proclaimed by the ruling coalition particularly PMLN as the halt in the regression of dollar amply proves. It otherwise was incomprehensible that in wake of global rise of dollar how Pakistani rupee could defy the prevalent trend and recover its value.

This recovery appears to be engineered though the official version insists that it has nothing to do with however the signs points otherwise.

In the meanwhile, the actual situation was brought to fore when in a follow-up to Pakistan’s sovereign rating downgrade, Moody’s downgraded the longterm deposit ratings and long-term Foreign Currency Counter Risk Rating (CRR) to Caa1 from B3 of five leading Pakistani banks stating that its outlook on all banks’ deposit ratings remains negative.

In this context it is pointed out that Ishaq Dar had strongly questioned the Moody’s sovereign rating downgrade, saying it was done unilaterally and without consulting the authorities even though one of the factors behind the negative rating action was the purported rscheduling of Paris Club debt which was not at all under consideration of the government of Pakistan.

Dar also challenged the data used by Moody’s in reaching the sovereign’s rating downgrade decision. On the other hand Moody asserted that its rating actions on banks followed its decision to downgrade the government of Pakistan’s issuer and senior unsecured debt ratings to Caa1 from B3 and maintains a negative outlook.

The downgrade has moved Pakistan and its leading banks to C-category after seven years, i.e. since March 2015. As part of the same rating action, Moody’s also lowered the Baseline Credit Assessments (BCAs) of ABL, MCB Bank and UBL to Caa1 from B3, and as a result, also downgraded their local-currency long-term CRRs to B3 from B2 and their long-term Counterparty Risk Assessments to B3(cr) from B2(cr). The BCAs of NBP and HBL were affirmed at Caa1. The outlook on all banks’ deposit ratings remains negative.

The rating agency said its rating reflected the government’s reduced capacity to support the banks, which has affected the banks whose ratings benefit from government support and the high credit linkages between the banks’ balance sheets and sovereign credit risk, which constrains the banks’ Baseline Credit Assessments at the level of the Caa1-rated government.

The downgrade of the NBP and HBL local-currency deposit ratings to Caa1, from B3, reflects the reduced capacity of the Pakistani government to support the banks in case of need. This is indicated by the downgrade of the sovereign’s bond rating to Caa1, from B3, which was driven by a worsening economic outlook, increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June.

The negative outlook on the bank ratings primarily reflects the rated banks’ very large holding of sovereign debt securities, at between 7-14 times their Tier 1 capital which will continue to link their creditworthiness to that of the government, whose ratings are on a negative outlook.

In order to shore up its dwindling finances the government is pondering to launch broadband cellular networks including 5G and other latest voice, data, satellite and other networks and withdraw the fragmented spectrum already available to different public sector organisations including defence and law enforcement agencies and auction that to telecom operators, satellites and other communication networks.

This major endeavour has come to light in the policy draft Framework for Frequency Spectrum Re-Farming. This major endeavour has been prepared first time in the country in accordance with the Telecom Policy 2015 section 8.5.1 and it is expected that the spectrum will be re-farmed where its current use is not in the best social and economic interests of Pakistan, it is underutilised, used inefficiently or its use is inconsistent with international allocations.

In this context it is reported that the incumbent users/licensees will vacate their spectrum assignments in a particular band either partially or completely so that the band may be allocated to other users.

In the process, the government will compensate the relevant organisation after the retrieval agreement. However, any change of technology by a licensee will be allowed by a concerned regulator with intimation to FAB. After FAB approval, PTA/PEMRA may grant a new license to any other operator including the satellite operator and broadcasting operator.

It is also reported that the government is under pressure by the IMF and the World Bank to integrate the sales tax on goods and services systems to avoid leakages and facilitate the tax payers and this condition is required to be fulfilled before a large loan of $900 is released.

The complication here is that the decision in this respect involves the federal government and four provincial governments, whose administrative or legislative approvals are needed to have one system for sales tax on services.

It is required to be recollected that earlier in March 2020, the NTC had been set up to harmonise the rates of taxes applied to the supply of goods and services and with the mandate to finalise the model sales tax laws on goods and services.

It is also reported that the IMF had also asked Pakistan to revise downwards its projection of foreign fund inflows on account of sovereign bonds, commercial loans and commodity debt.

The adjustment will make it harder for Pakistan to raise at least $35 billion worth of debt during the current fiscal year. The World Bank, which has promised to give two policy loans totaling $1.05 billion in the current fiscal year, is not approving the release of financing till complete integration of the country’s sales tax regimes.

For the financial policy managers, this looks to be a difficult task and has sharpened political polarisation as was revealed by the attitude of the finance departments of Punjab and KP governments that are run by intensely antagonistic PTI party.

It is known that Pakistan is seeking the approval of second Resilient Institutions for Sustainable Economy (RISE-II) budget support loan of $450 million by January next year and its approval will also unlock an AIIB loan of $450 million but the main stumbling block is the lack of consensus between the centre and four provincial governments on the harmonisation of GST on goods and services.

There is some basic disagreement over the definition of what constitutes a good and a service as the FBR is not willing to endorse the proposal of provinces that the definition being used for the harmonised system codes should be accepted as the FBR and the provinces have divergent views on trans-provincial services like restaurants, construction, toll manufacturing and transportation of oil across the country.