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There are two major foreign exchange inflows, read borrowing, expected as per several senior cabinet members including the de facto Finance Minister Shaukat Tarin that would arrest the rupee erosion: 3 billion dollars (yet to be parked in the central bank) as well as 1.2 billion dollar deferred oil facility from Saudi Arabia (reportedly already in use) and the successful completion of the International Monetary Fund (IMF) sixth review leading to the disbursement of one billion dollars.

This contention baffles many an economist given the government’s data of a current account deficit that is not under stress in spite of the 19 November 2021 Monetary Policy Statement (MPS) correctly noting that risks to the balance of payments have increased. The reason is a dramatic a rise in remittance inflows (over 29 billion dollars last year) – a trend that is persisting to-date, and foreign exchange reserves of 17.4 billion dollars (though the bulk is attributable to debt).

The MPS notes that the market based exchange rate acted as a shock absorber by bearing “a considerable burden in terms of adjusting to the widening current account deficit.” This contention is baffling as imports in the first quarter of the current year rose to 17.4 billion dollars (against 10.6 billion dollars in the comparable period of the year before and 11.2 billion dollars in the same period of fiscal year 2020 – the year when the current account deficit was cited as Pakistan’s major economic issue). Exports on the other hand rose to 7.23 billion dollars in the first quarter of the current year, a rise from the 5.34 billion dollars in the comparable period of 2021, though the link between rupee depreciation and exports has not yet been empirically established.

Be that as it may, the rise in the discount rate by 150 basis points on Friday last week may strengthen the rupee value especially as it is perceived to be undervalued at this stage; however, its long-term effects would remain limited as there other factors that influence the exchange rate are being ignored.

First, the difference between Pakistan’s discount rate in relation to other regional countries as well as our trading partners has widened. A high discount rate is normally associated with higher foreign capital inflows. In this context it is relevant to note that this was the overarching objective of the State Bank of Pakistan from July 2019 till the onset of the pandemic in March 2020 – however hot money as it is generally known is just as easy to exit a country and the bulk of these inflows have since been repatriated. Today Pakistan’s discount rate remains well above the regional and global average and yet inflows are largely borrowed at high rates of return, including the rate applicable on Roshan Digital Account (RDA).

This leads us to the second major determinant of a currency’s rate of exchange notably public debt: domestic debt rose from 16.5 trillion rupees inherited by the Khan administration to over 26 trillion rupees today while foreign debt has risen from 95.2 billion dollars in 2018 to over 126 billion dollars today – with more eagerly expected.

And finally, there are differentials in inflation – in Pakistan the rate is higher than in regional countries (which fuels smuggling from countries where trade is banned) and our major trading partners which is yet another reason for the erosion of the rupee.

Ignoring these economic factors our economic team leaders continue to wait for inflows from Saudi Arabia and the IMF to help stabilise the rupee.

During Prime Minister Imran Khan’s three-day visit to Saudi Arabia (23-25 October 2021), no statement, joint or otherwise, was issued as to the financial pledges made by the Saudis. On 26 October the Federal Information and Broadcasting Minister Fawad Chaudhary tweeted: “Breaking News Saudi Arabia announcement support Pakistan with 3 billion US dollar as deposit in Pakistan central bank and also financing refined petroleum products with 1.2 billion dollars during the year.” This announcement was followed by Hammad Azhar, Minister for Energy, tweeting a day later on 27 October that “Saudi Development Fund to give oil on deferred payment facility to Pakistan. Pakistan to get 1.2 billion dollar per annum oil facility. This will help ease pressure on trade and forex reserves as a result of global commodities upsurge.” A look at the Saudi Development Fund website does not show this funding yet.

The same day, on 27 October, Azhar attended a press conference with Shaukat Tarin who confirmed the 3 billion dollar support as well as the 1.2 billion dollar deferred oil facility stating that he had received a confirmation telephone call from the Saudi Finance Minister. Tarin did not share any details including the rate to be charged, if any, on the 3 billion dollars, its due date, and the number of years the deferred oil facility would be applicable. In this context it is relevant to note that while the Khan administration has shown a tendency to publicly announce external assistance and its source no doubt regarding it as a diplomatic coup yet China and Saudi Arabia in particular have a history of not making their assistance, lending or grant, public knowledge. Reports indicate that both Saudi Arabia and China expressed their reservations at the Pakistani government’s announcement of their assistance in 2019 yet clearly this did not deter the three cabinet members from making the announcement.

The IMF sixth review has been stalled since June 2021 given the February 2021 staff level second to fifth review agreement with the Fund. This delay is attributable to the summary dismissal of Dr Hafeez Sheikh in April 2021 and his replacement by Shaukat Tarin who refused to accept the harsh prior conditions agreed by his predecessor - particularly the 1.39 rupee per unit rise in electricity base tariffs (accepted since then), a comprehensive circular debt management plan

approved by the World Bank (not yet approved), the ending of 330 billion rupee exemptions (recent reports indicate that the IMF wants this implemented not through an ordinance but through a money bill) and the passage of a State Bank of Pakistan autonomy bill from parliament.

Tarin maintained that he would renegotiate with the Fund on phasing out these severely contractionary conditions as they would compromise the growth rate. There is no doubt that his confidence in being able to convince the Fund stemmed from his success in negotiating a more phased out, minimum upfront harsh conditions, programme in 2008. Tarin clearly miscalculated as the geopolitical considerations in 2008 were markedly different from today. In 2008 the then PPP-led government remained engaged in the US-led war on terror and capitalized effectively on Friends of Democratic Pakistan initiative after the end of Musharraf’s nine-year dictatorship. Today the level of US engagement with Pakistan is limited.

The ongoing twenty-third IMF programme, in marked contrast to the previous 22 programmes, requires: (a) implementation of upfront harsh conditions premised on the fact that Pakistan never implemented structural reforms it pledged in the previous 22 programmes. Administration after administration passed on the onus of achieving full cost recovery onto the consumers by raising rates while not dealing with the politically challenging structural weaknesses. This situation continues today with tariffs skyrocketing while circular debt rose from 1.2 trillion rupees in 2018 to over 2.2 trillion rupees today; (b) focus on raising revenue which given the heavy reliance on indirect taxes, whose incidence is greater on the poor than on the rich, is having serious negative political implications on the ruling party especially as the honeymoon period is long over. Sadly, this has implied higher reliance on petroleum levy as well as on sales tax – taxes passed on in their entirety onto the general public. One would have hoped that Tarin had focused on slashing expenditure by insisting on major recipients of the budget to make a sacrifice for the next two years but instead he has raised current expenditure significantly; and (c) 38.5 billion dollar external funding is a condition of the thirty-nine month ongoing programme or in other words roll-over of loans by ‘friendly’ countries mainly China and Saudi Arabia till September 2022, the scheduled end of the programme. This first time applicable condition has implied a focus on primary deficit, excluding debt repayments that accounts for the massive rise in public debt, including more concessional borrowing from multilaterals/bilaterals for which it is critical that the country is on a Fund programme, as that provides a comfort level that the country will remain on an IMF rigidly monitored reform agenda.

Thus the government is waiting for 3 billion dollars from Saudi Arabia, which when reported allowed the rupee to strengthen for no more than three to four days, and the one billion dollars from the IMF after the successful completion of the sixth review. IMF disbursement, Tarin stated recently, would enable the rupee to recover and “speculators will take a hit of 8 to 9 rupees per dollar. I have asked the State Bank the [rupee-dollar exchange] rate should move both sides. Otherwise, speculators would play.” Alas this does not take account of other economic factors contributing to the rupee erosion.

Copyright Business Recorder, 2021

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