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This is apropos a J.P. Morgan report carried by the newspaper on Friday. Although publishing reports is JP’s lawful right, it did not give the required enough reasoning to substantiate its argument. The following is, therefore, counter-argument by this writer:

It has been rightly pointed out that the development is in the positive mode and there is risk of a rising current account (CA) deficit, as higher oil price and surge in imports pose the risk if the climb does not stop.

There is no reason to believe home remittances will fall; they will continue to inch up as the environment surely favours possible increase in inflows to Pakistan.

On July 18 2020, through this newspaper, this writer had challenged the World Bank’s estimate that projected a 20% decline in home remittances. This writer’s argument in support of an increase in inflows remains unchanged. Traveling could be easier for passport holders of advanced economies but this will not be the case with Asian and African workers/migrants.

Although oil prices have stabilized thus reducing the risk of job losses in the Middle East is good news, severe restrictions are imposed on Asians/African travellers to the Gulf countries due to vaccinations and vaccine brand factors, hence no one will be willing to take unnecessary risk of travel that will continue to support official inflows.

The State bank of Pakistan’s (SBP’s) timely strategy of concession up to $ 100 is quite attractive for expat labour. The biggest support comes from SBP’s stance on Anti-Money Laundering/Combating the Financing of Terrorism and Countering Proliferation Financing (AML/CFT/CPF) courtesy the FATF. Well aware of its benefits, it continues to update regulations on a regular basis.

Due to severely reduced traveling, the Kerb market window/activity has reduced to almost nothing. The Hajj/Umrah, which is an over $ 4 billion market, is almost shut because of restrictions. Khepis are almost out of action due to travel restrictions while slowdown of Credit Card usage is helping too. This is of immense help, which will push remittances higher to cross $ 30 billion mark.

It is too early to forecast the exchange rate moving towards Rs 168.7 by end of fiscal year 2022, as the economy will hopefully comfortably surpass 4.5% growth. This writer is expecting a sharp increase in economic activity by the end of the year, as the government will have more room after clearing the IMF review in October FY23. This is quite normal and a global practice when the government completes its IMF programme it cannot afford to have a weak rupee as it will pose a huge election risk because it would sharply push inflation higher. A government seeking re-election cannot afford such adventurism.

Major overseas remittance contributors are from GCC countries that produce nearly 30 million barrels of oil per day. A good number of Pakistanis survived their jobs when oil prices were melting and job losses were a threat. The sheikhdoms such as Oman and Bahrain with fewer buffers debt did not send expat workers home in large numbers, although they were faced with funding issues that saw sharp surge in.

The UAE and Saudi Arabia where there is the largest number of expat workers from Pakistan did manage to stabilize their economies as they diversified their strategies and became more active in non-oil trade.

Commodity prices around the globe may be higher due to easy flow of money because of quantitative easing and low interest rate policies. Talk of taper does not mean a sharp hike in rates. Lower interest rate environment will stay for many years. It is more important to recognise that higher commodity prices are caused due to increased demand and transportation costs. Demand for edible oil, corn, wheat, sugar and lentils also surged sharply.

This, however, has nothing to do with the Pakistan market. We suffered due to administrative infirmities that caused shortage of food items. Once bitten twice shy: Pakistan surely will not repeat the mistake and is likely to export if it produces in excess. Holding excess food in reserves would be a more sensible strategy.

A stable rupee will not allow much change in electricity tariff, it will also help rein in petroleum prices. Tax collection should get close to Rs 5.4 trillion, which will depend on the size of imports and tax collection strategy. Fiscal year deficit too will depend on the above numbers. It can surpass 7% in case of an increase in economic activity. Trade gap will surely widen to some extent.

Sensible fiscal and monetary strategies right from day one will give an opportunity to have a good grasp on the economy. It requires good administrative management by not allowing rural inflation to rise; containing urban inflation will be easier.

While inflation is expected to remain in single digit - below 9%. SBP will have to take a leaf from global economic policy makers and instead should consider reducing policy rate by another 50 to 100 basis points around or after 2nd quarter of fiscal year 2022. In a G7 meeting leaders were in broad agreement to support their economies with fiscal stimulus; IMF, too, has been repeatedly persuading G7 for fiscal stimulus support.

During a G7 meeting in the UK, European Central Bank President, Chritine Lagarde has said that to avoid rise in interest rates that could hurt recovery and to reassure investors, rich major Western economies needed some sort of “long-term fiscal anchor”. Further lowering of rate will help in lowering the debt to GDP ratio.

Any hike will depress the ongoing momentum and stable market conditions could once again start to wobble, disturbing the on-going momentum.

The question that needs a clear answer is how we are going to manage if the debt relief package ends in FY22. Slower economic activity risks further increase in both domestic and external financing, which will keep our monetary and fiscal managers on their toes.

This is why there is dire need to reduce the size of Government of Pakistan Holdings, which will provide liquidity and funding space to banks to generously lend to the private sector and increase lending to the agriculture sector as well. It will surely give a big boost to economy.

(The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper)

Copyright Business Recorder, 2021

Asad Rizvi

(The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper)

He tweets @asadcmka

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