Now that the evacuations from Afghanistan are complete and foreign troops have departed from the country, the real game begins. Up till now, everything was in a state of limbo since the focus in the Western capitals was largely on ensuring the safe removal of their people and those who worked with them.
This is the critical question facing Pakistan today: will the Western world turn its back on Pakistan now as it did after the end of the Afghan war in the 1980s? If so there are very significant implications for Pakistan. But if wiser counsel is to prevail, and despite the sting of withdrawal, the Biden administration opts to take a pragmatic road forward and maintains an engagement with Pakistan (and Afghanistan as well), then it will be critical to find out what sort of engagement they will have in mind.
Crucial month
Much rides on this question, especially given the timeline that lies before Pakistan. The month of October is critical, for four reasons. One, Pakistan will be seeking to resume its programme with the International Monetary Fund in that month, specifically during the annual meetings scheduled between the 11th and 17th of that month.
Second, there is a $1 billion Eurobond maturing on October 13, and the government is hoping to float another bond around the same time so repayment of this one does not drain the reserves. Third, the Financial Action Task Force plenary meetings are scheduled from October 17 to October 22, right after the IMF annual meetings, and the watchdog is set to decide whether or not to pull Pakistan out of the grey list in this meeting.
Recall the last meetings in June attached a few more conditions for the country to meet and put the question off till the next meetings. And fourth, and possibly most importantly, October is the month in which Shaukat Tarin’s six-month appointment as finance minister is set to end. He must either become a member of the national assembly to continue or step down.
All these events on the timeline are interlinked. The IMF is of the mind that Pakistan needs to start unwinding the stimulus measures it announced last year as part of its Covid response plan, measures like lower interest rates, subsidised credit for industry from Pakistan’s State Bank, an amnesty scheme to pump black money into construction and so on. But Imran Khan is of the opposite mind. He wants to ramp up growth even further and announce a vast social protection programme called Kamyab Pakistan in addition, putting a further burden on government expenditures.
This growth is leading to a rise in imports and causing the trade deficit to swell, sending the government on a borrowing spree to shore up the external sector and prevent a drain of foreign exchange. And just a few days ago, the government’s own Economic Advisory Council advised it to place a two-year moratorium on foreign borrowing, seeing how rapidly this debt was building up and the prevailing uncertainty around the future direction of interest rates in global markets.
Waiting for Biden
So Pakistan is likely to face an uphill task at the IMF in October, and will most likely require some support from the US, which has considerable clout at that institution, if the programme is to resume without unwinding the stimulus measures. If the programme fails to restart in October, and Shaukat Tarin returns from the annual meetings in Washington, DC empty-handed, it will have serious consequences for the country’s ability to raise more external debt to pay for the ongoing growth.
That moment will be the first critical reveal of where Pakistan stands in the eyes of Western capitals, particularly the US. Until then, people will be listening to statements coming out of the Biden administration very carefully to parse them for hints and clues as to how they are viewing their engagements with the region post withdrawal.
This puts Tarin in the unenviable position of having to convince Imran Khan to take unpopular decisions precisely at the moment when Khan will have to decide whether or not to continue with Tarin as the finance minister. This will be a tricky moment and it will be interesting to see how it plays out.
The FATF plenary will be the second moment to reveal where Pakistan stands in the eyes of the Western capitals, particularly the US. If Pakistan fails to graduate from the so-called grey list it will send a powerful signal around global markets that the country’s financial system remains under a shadow. It will not be a good signal at all.
The best outcome for the government, given its present priorities, is a resumption of the Fund programme with minimal roll-back of stimulus measures, and further postponement of decisions on power tariffs and revenue hikes, followed by graduation out of the grey list. Along the way, if the Eurobond maturity can be followed up by a new flotation thereby keeping the reserves intact, it will be ideal, for their own priorities that is.
But if Pakistan sees another postponement on programme resumption, followed by continuation on the grey list, it will mean the government is drifting towards estrangement from the Western capitals. And if October sees a new finance minister coming in, we will know the country’s growth path has hit choppy waters, as it inevitably will at some point.
Arrangements for all this have to be made and finalised in September. This is when the finance ministry must draw up its letter of intent for the next review with the Fund, where the power ministry must show that the circular debt has been curtailed and a viable plan exists to draw it down without raising power tariffs, where the political leadership has to decide how to get a Senate seat for Tarin if they are to continue with him. A lot rides on that phone call from the White House, for which they are so obviously waiting.
This article first appeared in Dawn.
