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Last week was a roller coaster. The spillover of political uncertainties was felt severely on economic front. Fragile economic conditions — especially falling foreign exchange reserves, are loudly inviting attention of policymakers. There was no government in Islamabad to take note. Then on Thursday, while Supreme Court brought a direction on the political front, SBP (State Bank of Pakistan) also came up with an emergency meeting to increase the policy rate by 250 basis points (bps).

Prior to that, government debt papers cut-off yields crossed 13 percent and PKR touched an all-time low of 189 against USD. Then, the IMF spokesperson welcomed the SBP’s move of increasing policy rate — a much-needed comforting statement from the Fund. On Friday, the apparent anxiety in the markets eased. The stock market rose. The PKR/USD fell back to below 185 mark, and the secondary market yields are down, albeit marginally. However, that improvement doesn’t mean that the economy is out of the woods. All it shows how important is for the policymakers to be active in days of dwindling foreign reserves – SBP reserves cover mere 6-7 weeks of imports. That is a point of concern which needs immediate attention.

A new government is in the making. The incoming government faces an uphill task. They must take tough fiscal decisions that should have the nod of the IMF. The key objective in the immediate term is to build foreign reserves- SBP reserves should not fall below $10 billion ($11.3 billion as of 1st April 2022). Once SBP reserves cross $15 billion, markets will begin to relax. The government should try to get rollover of $2.4 billion of Chinese loan as soon as possible along with receiving support from friendly Middle Eastern countries.

At the same time, there is no time to relax and Pakistan must not continue with the populous fiscal measures. IMF 7th review is delayed due to three prime reasons. One is the freezing of petroleum prices, the second is not passing on of fuel price adjustment (FPA) on electricity, and the third is the amnesty scheme offered on manufacturing. All three must be rolled back immediately to invoke supportive stance from the Fund.

Passing on the impact of increase in the energy prices to the consumers is the right thing to do to check demand. There are multiple adverse implications of not doing so. One is that the demand has remained unabated and the impact on the import bill is due to both growing (or not falling) volumes and value of imports. With persistently high international oil prices, the gap between prescribed prices (by OGRA) and actual prices is growing. Then the PKR depreciation is further expanding the gap. It is becoming a vicious cycle.

To end this, some prudent, coordinated and well thought-out monetary and fiscal policies responses are required. And the first step is to increase the petroleum and electricity prices from the fiscal side. That step is long pending. SBP did its work – by increasing the policy rate by 250 bps and other changes to control import and to incentivize exporters to sell in forward. The exchange rate responded. The panic of a free fall has subsided for the time being.

Some semblance of stability in PKR is also needed immediately, as it would not only restore the business and consumer confidence but would also reduce the gap between prescribed and actual prices and would result in weaker transmission in consumer prices. And that in turn would require lower quantum of rise in interest rates.

For all these policies to be actioned in a coordinated manner and to receive the nod of the IMF, continuity of key members of economic team is imperative. For example, the Governor SBP’s term is ending in less than a month. It may help if the upcoming government keeps him around for now as it signals continuity to IMF, which would help in gaining its trust. However, it depends on who would be nominated as finance minister in the new government.

If Dar or ‘Dar-esque’ style of economic management is revived, then there might be changes at the SBP. History suggests that Dar prefers subservience from SBP and doesn’t appreciate professionals with a mind of their own. The other option is for Miftah Ismail to become the finance minister. He is an economist by training and has a good sense of how businesses are run in Pakistan. His policies during a short-stint as finance minister in 2017-18 were a decent package and fared better than Dar’s. Miftah’s plans are in line with what is being advocated in this article. On a question of what sort of fiscal policies are needed, he responded that a reduction in the budget deficit is needed for compression in the current account deficit which would help stabilize the PKR and in turn reduce inflation.

Moreover, he is cognizant of the fact that the IMF nod is imperative. However, the pending 7th review may not conclude and it’s likely to be clubbed with the 8th review – for which some more pre-agreed steps are to be taken – mainly in the upcoming budget. This would mean there is no room for announcing a populist budget. The next budget will not be an easy one to present.

The bottom line is that times are tough. But right economic policies with calm on the political front can take the economy out of yet another crisis.

Copyright Business Recorder, 2022

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Ali Khizar

Ali Khizar is the Head of Research at Business Recorder

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