Why is the rupee continuing to erode even after the International Monetary Fund’s (IMF’s) tranche release of 1.17 billion dollars is a question that Finance Minister Miftah Ismail is responding with platitudes mixed with a rather large dose of prayers.
It is instructive to look at the reasons cited by Ismail mid-November 2021 when the currency plummeted to 175 rupees to the dollar. Today it is over 240 rupees to the dollar in the open market and 236 rupees to the dollar in the interbank market and it is noteworthy that three out of the four reasons he cited at the time have considerably worsened during his tenure since 19 April 2022 when he took oath of office.
First, the one reason that is no longer applicable notably in November last year there was uncertainty about the renewal of the IMF programme while the seventh/eighth review has been successfully completed with the tranche disbursed earlier this month.
However, what is noteworthy is that while in November 2021 the pledged assistance from other multilaterals and bilaterals was contingent on signing off on the dotted line with the Fund there has been no inflow of pledged assistance yet, specifically the 4 billion dollars that includes the Saudi oil facility, since the Fund tranche release this month. The roll-over of 7 billion dollars by friendly countries plus the IMF tranche disbursement has not raised reserves to beyond 8.7 billion dollars which are not enough for more than a month and half of imports.
There is no doubt that Hafeez Sheikh dismissed by Imran Khan on 29 March 2021 will be long remembered for agreeing to a Fund programme that showed complete lack of empathy with the hapless Pakistani public on whose behalf he signed the Letter of Intent - a prerequisite to Board approval of the programme. And prior to his dismissal he signed off on the second to fifth review agreeing to even more harsh upfront conditions that led to the release of the tranche on 24 March 2021.
Sheikh’s successors, both Shaukat Tarin and Miftah Ismail, initially condemned the agreement signed by Sheikh followed by expressing confidence in their ability to renegotiate the terms, specifically with respect to phasing out the harsh upfront conditions; later both men were forced to capitulate due to the severe balance of payments issues facing the economy, the second reason for the rupee erosion cited by Ismail in November last year.
July-December 2021 the trade deficit (a major component of the current account) was negative 25.522 billion dollars while in April, May and June 2022 the imbalance was higher than the comparable period in 2021 – negative 3.782 billion dollars in April 2022 (against negative 3.024 billion dollars in April 2021), negative 4.151 billion dollars in May 2022 (against negative 3.626 billion dollars in May 2021) and negative 4.962 billion dollars in June 2022 (against negative 3.624 billion dollars in June 2021).
July-August 2021 the trade imbalance was higher at negative 7.581 billion dollars against negative 6.269 billion dollars in the comparable period of 2022 – a decline reflective of decisions taken by the government which the Fund claims were violative of the programme agreement on exchange restrictions and include: (i) payment authorization from SBP a requirement before initiating transactions for importing certain goods with approval granted in a discretionary manner; (ii) ban on luxuries partly repealed end-August 2022; and (iii) while the authorities convinced the Fund that due to prevailing disorderly market conditions in the foreign exchange market they would continue to limit advance payments for imports against letters of credit (L/C) and advance payments up to a certain amount per invoice (without L/Cs) for the import of eligible items till complementary economic policies have not fully kicked in yet one would assume that the Fund would raise this matter during the ninth review scheduled for 3 November this year.
While acknowledging that these steps were violative of the agreement with the Fund yet it is baffling why the issue of the floods was never raised by the Pakistani team leaders during negotiations on the seventh/eighth review and exemptions sought by the government till such a time as the relief and rescue efforts had been replaced with rehabilitation measures.
Tarin capitulated nearly nine months after taking charge by passing a mini-budget on 31 December 2021 that withdrew tax exemptions of 343 billion rupees though he claimed success in convincing the Fund that the poor man would be burdened by 2 billion rupees only – a claim disputed by productive sectors claiming that their output would be affected which, in turn, would translate into lower productivity with a consequent impact on employment opportunities; and granting autonomy to the State Bank of Pakistan, a long-standing demand of the Fund, though in this country there is many a slip between the letter and spirit of the law. True that while in February 2022 Tarin was on track in meeting Fund conditions by 28 February 2022 the then Prime Minister Imran Khan announced a massive rise in unfunded subsidies for which there was no fiscal space.
Miftah Ismail did not take as long to capitulate as Tarin, probably because the trade deficit figures became extremely worrisome and with the devastation wreaked by the floods with agriculture crop, particularly cotton, all but destroyed, it is feared that trade deficit will worsen in months to come.
Third reason cited by Ismail in November last year for an eroding rupee was inflation. In November 2021 consumer price index was 11.5 percent against 27.3 percent in August 2022 - with government decisions including the utility price rise and the imposition of petroleum levy to meet the Fund conditions major contributors to the rise.
Core inflation was 7.6 percent in November 2021 which has rose to 13.8 percent in August 2022 (partly due to the floods but also due to the rise in transport rates and the one trillion rupee rise in current expenditure bafflingly budgeted in spite of the fragile state of the economy). Sensitive price Index year on year in November 2021 was 18.1 percent which today has risen to 34 percent with the rise this week past well over 40 percent. Again while external and domestic factors are responsible for this massive rise yet flawed policies as well as failure to negotiate with the Fund based on the unprecedented devastation caused by the floods must be considered as contributing factors.
And finally, Ismail cited the massive rise in money supply as the raison d’etre for the eroding rupee. There is no doubt that during the Khan administration reliance on borrowing domestically rose from 16.5 trillion rupees to over 27 trillion rupees however the following comparative data should be a source of concern to the incumbent government: (i) Broad money on 26 November 2021 as per the SBP was 24,018,069 million rupees against 27,079,854 million rupees on 2 September 2022; and (ii) borrowings for budget support on 26 November 2021 was 16,293,150 million rupees while by 2 September 2022 the government had upped it to 18,586,559 million rupees.
To conclude, while many are holding political uncertainty responsible for the current state of affairs yet ill-advised decisions for example the budgeted rise in expenditure this year, the failure to-date to bring the Fund on board on the flood damage, and last but not least claiming that default has been averted before the pledges have been disbursed reflect some serious faux pas by the incumbent government that require remedial measures.
Copyright Business Recorder, 2022