What are the challenges that await the new finance minister? – Pakistan

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The banker-turned-finance minister faces the difficult task of managing the national kitty and steering the country out of its incessant economic crisis.

Muhammad Aurangzeb, a former chief executive of Habib Bank Limited (HBL) with extensive experience in the financial sector, has taken the reins as Pakistan’s new finance minister.

He inherits a daunting economic landscape, grappling with intertwined issues like inflation, unemployment, and significant budget and current account deficits.

A note by Topline Securities stated that the investors were keen on seeing how he performs, as the former banker is hailed as a “solid finance guy” through and through.

Muhammad Aurangzeb is the new finance minister.

But what are the challenges he faces, in the short and long term? Dawn.com spoke to analysts to get some answers.

“longer and larger” ec­o­­nomic bailout package with the IMF.

Khurram Husain, a business and economic journalist, says that the newly appointed finance minister will face the herculean task of “securing the last IMF tranche of the current programme as it comes to an end in April and then negotiating a new one immediately after in the coming months”.

According to macroeconomist Ammar H. Khan, the need for the IMF programme is tied to the country trying to avoid a current account crisis.

“The first challenge the finance minister would have to overcome is essentially closing the programme so the country can move towards macroeconomic stability,” he says.

Ali Farid Khwaja, chairman of KTrade Securities, notes the first short-term step the finance minister would have to take on is delivery on economic reforms to ensure the IMF’s support to avoid a sovereign default, and to ensure that the “global markets believe that he can deliver on IMF reforms”.

Amreen Soorani, head of research at JS Global, states that the new finance minister “faces two critical, interlinked tasks” which include concluding the current IMF Stand-By Arrangement (SBA) and negotiating a new, longer-term IMF program.

“Unlocking further financial assistance from the IMF would maintain Pakistan’s access to international financial markets” Soorani says, adding that a longer programme duration will “offer stability and predictability for implementing economic reforms”.

On June 29, the country got a green light from the IMF for a $3bn bailout programme, with an immediate disbursement of about $1.2bn followed by $700m in January.

The current IMF programme is expected to conclude in the second week of April, with the government readying itself for a bigger bailout in the coming months.

conducts a Debt Sustainability Analysis (DSA) before it decides on lending to a country to ensure they are on a “sustainable development track”.

The process of debt restructuring is essentially used by a country to avoid the risk of a sovereign default on its existing debt. This can include negotiating rollovers or lower interest rates on existing loans.

According to an Atlantic Council, debt restructuring is “essentially a zero-sum game of allocating the burden among different creditor groups”.

The IMF says debt restructuring for low-income countries poses different challenges externally and domestically. Domestically, there can be “difficult trade-offs between the need to restructure sovereign debt owed to domestic banks” in addition to impact on financial growth. Externally, this will give rise to coordination challenges due to “increased diversity in the creditor composition”.

The “real big job”, according to Husain, will be managing the status quo and the “untenable debt”.

Recently, a report by Tabadlab stated that Pakistan’s debt profile is “alarming” while the country’s borrowing and spending habits are “unsustainable”, stating that the country’s total debt and liabilities — including domestic and external debt — is at a whopping Rs77.66 trillion, or $271.2bn.

The report said that since 2011, Pakistan’s external debt had nearly doubled while the domestic debt had increased six-fold, of which the country would need to pay back an estimated $49.5bn in debt maturities — 30pc of it being interest.

Another report called Pakistan’s External Debt Dilemma written by Farrukh Iqbal and Ijaz Nabi and published by the Center for Global Development concurred with the findings. It highlighted that the country’s debt servicing had been weakened by “poor export performance”, adding that the new government would have to take on the essential task of restructuring external debt.

Khurram Schehzad, chief executive of Alpha Beta Core, says that the new government will have to immediately work on debt reprofiling — another way of saying debt restructuring — “to make the country’s debt sustainable and manageable”. This includes local and foreign, with a special focus on the Chinese portion for the next three to four years.

Khwaja observes that there is a need to “strengthen communication, collaboration and trading relationships with the countries that have to roll over the bilateral loans”. These countries include China, the US, UAE and Saudi Arabia. He elaborates that a “good relationship with our creditors is needed to avoid a sovereign default”.

According to the Asian Development Bank, circular debt consists of the total liability position of the power distribution companies (DISCOs) in the country to the Central Power Purchasing Authority-Guarantee (CPPA-G) which is further complicated by delayed payments by the CPPA-G to the generation companies (GENCOs).

Moreover, Schehzad notes that the energy and the finance ministries will have to work closely together to overhaul the energy sector “from single-buyer market to multi-buyer market”.

A multi-buyer market diversifies risk by reducing its dependence on a single-buyer’s ability, and it often leads to commercial attractiveness.

Furthermore, he adds that restructuring of the transmission and distribution sector, investment in alternatives (such as wind and solar) with more decentralization, lowering taxes on electricity to reign in inflation, and restructuring on Independent Power Producers (IPP) debt with the Chinese would be steps in the right direction.

Privatisation

Previously, the upcoming finance minister had talked about following through the caretakers’ policies, elaborating on the imminent privatisation of the national flag carrier, Pakistan Interna­tional Airlines (PIA).

Schehzad points out that state-owned entities (SOEs) will “need to be restructured in terms of their managements and boards, where independent boards appoint competitive management to reduce losses, streamline operations and improve revenue streams”.

Mohammed Sohail, chief executive of Topline Securities, adds that the finance ministry will have to follow up the caretakers’ policies of “privatisation at a fast pace” and attract “immediate investment from our Middle Eastern friends” to tackle the economic quagmire.

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