THE ordinary man in Pakistan doesn't have to look at prime minister Nawaz Sharif's grim face to know that his country is on the verge of economic ruin. He knows it instinctively. The stockmarket is hovering at its nadir, the banking system has gone haywire, and the government, which has never defaulted in its 50-year history, is set to announce a moratorium on debt repayments in the next couple of weeks.
Not surprising. With an outstanding external debt of $30.7 billion, annual debt servicing comes to around $3.7 billion in the current fiscal. But Pakistan's foreign exchange reserves have sunk to an all-time low of $750 million. All other fund flows have virtually dried up thanks to sanctions, and further borrowing overseas is not a viable option anymore. Add to it the constant flight of capital from the country. Says an official: "This is just the beginning. If we can't raise another half a billion dollars in July for debt servicing, Pakistan may default in August."
With push coming to shove, the government is taking desperate measures. First came the freezing of foreign exchange deposits worth around $11 billion. Enraged by this breach of trust, embittered depositors are already calling it "the great bank robbery". "The government took full advantage of the emergency and retired a short-term liability of over $11 billion in one go," says a leading banker in Karachi. Then, last month, the State Bank of Pakistan (SBP), the country's central bank, gave a clear ultimatum to foreign banks: roll over your swap funds or face the music. As a result of the arm-twisting, banking circles claim, roughly $300 million worth of swap funds which had attained maturity in June were rolled over by leading foreign bankers. But the credibility of SBP, whose governor Muhammed Yakub ambitiously announced two months ago that "we have never defaulted for a single day or a single minute", lay in tatters.
Bankers say technically this means Pakistan has already defaulted on its foreign debt repayments. Altogether, it requires about $7 million to cover, mainly, debt servicing, the trade deficit and outflow of swap funds on maturity. "An official moratorium is now the only option left for Pakistan to conserve its foreign exchange reserves, which have plunged by about $500 million since May and stand at around $750 million now—enough to finance only three weeks of imports," says a banker.
And if the government was expecting public sympathy, it has not been forthcoming. Says Shahid Ahmed, a manager with a private firm: "If the government has long been running on empty, why were drastic austerity measured not announced earlier? Millions have been spent daily for many years to support the luxurious lifestyle of officials; why were their expenses not cut prior to the nuclear explosions?"
Adds money changer Munaf Kalia: "Personally I am happy, I've made a lot of money due to the freeze on foreign currency accounts. But it is not good for the country."
Pakistan needs about $1.6 billion by September just to continue to service its debt. So unless the G-7 countries indicate soon on some softening of the sanctions, it has little hope for a bailout. Unfortunately, Pakistan is not due for any World Bank loan in the next few months. Still, an eight-member SBP team is now in Washington to try their luck with a $400 million financial sector reform loan. As for the IMF restructuring loan, all negotiations are currently off. As an IMF official said recently: "It's a political problem and it has to be solved politically. It is the G-7 which has to decide whether to save this country or let it go under."
The minimum direct impact of the sanctions, according to finance minister Sartaj Aziz, is: a $1.5 billion drop in foreign loan inflows, a $1 billion drop in forex deposit accounts. Indirectly, the shabby treatment meted out to the private power sector, and the increase in Pakistan's country risk, has already driven out portfolio investors. Remittances too are likely to be channelled through the hundi system due to the marked difference between official and kerb rates of the rupee, which are at Rs 46 and Rs 54, respectively. "Guarantees" by an almost-bankrupt government have little meaning now.
While Sharif and his cabinet are desperately trying to put the entire blame for this crisis on the sanctions, a fair share of it should also go to the government's own team of economic wizards with whose help Sharif had once vowed to turn Pakistan into an Asian Tiger. These top guns have been shuttling between Karachi and Islamabad, talking to finance experts, looking for the elusive solution. Independently, few of them see an economic revival in the near future. The reason is endemic, they say. For too long, the country has lived off debt. And successive governments have dipped into the forex till whenever necessary. None of them, however, has been in a position to honour depositors' cheques in case of a run on forex accounts. Over the last six years, external debt has surged 6.5 per cent every year in dollar terms (20 per cent in rupee terms) to reach $30.7 billion (as of March 1998). Worse, most of the new debt has come from short-term and medium-term borrowing, now taking 21 per cent of the total debt. And their share is set to rise in the post-sanctions scenario, especially after credit-raters Standard and Poor and Moody's lowered Pakistan's ceiling for foreign-currency debt to B3 from B2 and for bank deposits from B3 to Caaa3. (Since 1994, Moody's has downgraded Pakistan three times.) And the downward pressure remains, it said in a recent analysis.
MOODY'S minced few words listing the structural deficiencies of the economy: "a lack of economic and export diversification... and high debt service requirements that left little room for fiscal manoeuvre." Result: a record high internal debt of Rs 1,124 billion ($24.5 billion) at an average interest rate of 13 per cent. In fact, interest payments alone takes Rs 191 billion annually. What is more worrying, three-quarters of this domestic debt is concentrated in floating and unfunded debt, in other words, the more expensive short-term borrowing and national savings schemes. This component of domestic debt, in fact, has gone up by almost three times in the last six years, while the debt stock has expanded by only 16 per cent.
To meet ballooning government consumption, internal borrowing went up by four and half times in the last 12 years. Post-financial reforms in the '80s, the cost of borrowing also went up. As a result, growth rate declined from 7 per cent (annual average) in the '80s, to less than 5 per cent in the '90s and even lower of late. Moody's expects 1997-98 growth to be only 4-5 per cent.
Although Aziz says the government is trying to reverse the trend of financing current account expenditure through domestic borrowings, the 1998-99 budget projects a 13 per cent increase in domestic debt over the previous year. And, playing a leading role here are borrowings under the national saving schemes, which should perhaps now be renamed National Borrowing Schemes.
Desperate times brook desperate measures. A dangerous suggestion floating around in Islamabad these days is that the Rs 381 billion of national saving scheme deposits, the fastest growing liability in recent years, be converted into junk bonds like Wapda and KESC shares. If this is implemented, the backlash from depositors, especially those who have invested their life's savings in these schemes, will be severe. So much so that the cooperatives scam in the Punjab a few years ago will pale in comparison.
In last-ditch efforts the prime minister has sent emissaries to Islamic countries for help. Though Pakistan has been offered all kinds of help including furnace oil on deferred payments and increased credit facility for commodities, there has been no indication of any cash coming from these countries.
A desperate Sharif has now put up for sale his pet project, the palatial 372-room secretariat in Islamabad, which cost Rs 100 crore to build and from where he shifted with much fanfare after sanctions were announced. Bids have been invited by August 17, as it's time to pay up $1.6 billion the month after. The grand Mughal-style building may now become a hotel. Mirroring perhaps the consequence of the government's several years of profligacy, political shortsightedness and imposing a debt burden of Rs 19,049 on the head of every Pakistani.