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The economy is closing in external payment ‘implied default’ situation. This means that with SBP’s (State Bank of Pakistan’s) forex reserves depleted, authorities may forcefully cut down imports further. SBP’s reserves as of now (to be published on Thursday) are likely to be below $7 billion. At such a critical juncture, the finance minister is publicly claiming that he does not care about the IMF (International Monetary Fund); he’s certainly playing with fire, to say the least.

Dollars have dried up in the interbank and open markets. Without the IMF, there is no recourse that may allow us to stay afloat. And the finance minister is living in his own fantasy world. The story started with political uncertainty after VoNC (vote of no-confidence), and there has been no stopping it since.

The optimal response of course would have been if the outgoing PTI (Pakistan Tehrik-e-Insaf) government had not frozen fuel prices, but the post-VoNC lingering by Shehbaz-led government did not help things either. Now it’s incumbent finance minister’s turn. The government should have reduced the working week and taken other measures way back in summers; but the first call by the PM was to increase the working week to 6 days and prepone import of petroleum and LNG at peaking prices.

SBP had no choice but to respond. It began with the then finance minister Miftah Ismail placing quotas on certain imports. That successfully resulted in lowering the imports. But due to this, both exports (due to shortage of raw material) and remittances (due to conversion of imports to informal channel) fell as well, which partially diluted the impact on the current account deficit decline.

Nonetheless, the current account deficit is now subdued significantly; but the financial account situation is now reaching alarmingly dangerous levels as external loan repayments are increasing, without injection of fresh loans. Now, with SBP forex reserves under $7 billion, SBP has informally instructed commercial banks to lower the import quota of each bank (barring defence and petroleum group) by another 35-40 percent. This would lead to further disruption in the supply chain.

Concurrently, ironic developments are taking place. One element is abolition of the regulatory duty (RD) on EVs from 100 percent to zero. That has made expensive EVs affordable for the superrich club. RD on EVs has been slashed (earlier than other cars) under the pressure of a few parliamentarians. All they care about is their fashion statement of driving e-tron and likes. Expect 100s of EV imports in 1 to 2 months.

On the other hand, SBP is placing restrictions on direct carrier billing (DCB) due to procedural lapses. Everyone knew about the loophole in these procedures, but still the system was working just fine. Overnight, SBP realized that the regulations must be enforced in both letter and spirit. DCB payments are used against digital purchases by those who usually don’t have credit or debit cards, through their mobile network credit/balance. Reportedly, this payment was no more than $34 million, probably much less than the amount spent on EVs’ purchases in a month. Go figure.

Then another issue is of soybean imports stuck at port. The shipment is being cleared and the payment has been made. Still $300-500 million worth of soyabean is stuck. It is not cleared on the premise of being GMO which is not allowed in Pakistan. Going by law, that is correct. But for the past many years, the same GMO soyabean was being imported without certification. The supply chains have been developed and it is critical in preparation of meals for livestock – both chicken and cows. Without this being cleared, expect shortages (and inflation) in chicken and milk in the coming months.

This is sad and ironic. On one hand, SBP is putting restrictions on imports to save falling forex reserves, at the cost of a slowdown in the economy, shortages of goods, and job losses. On the other hand, government functionaries have overnight realized the health hazards of GMOs to further exacerbate the shortages.

Nothing makes sense. There are multiple supply chain distortions. Engineering sectors are operating at half the quota. There are issues with imports of raw materials and availability of spare parts for exporters. Export proceeds are falling.

It’s not just because of the global slowdown. For example, Bangladesh’s textile exports are increasing as the country is replacing China’s exports to the West. However, in Pakistan working capital is short and inputs are expensive. This is even though there has been massive expansion in the textile industry in the last 2-3 years. But factories are still shutting down.

Reaching out to the IMF could not be more urgent. Yet, the attitude of the finance minister has sent shockwaves through financial markets. Everyone (who can) is hoarding dollars. As a result, reserves are falling. The new restriction of 35-40 percent import quota might not be enough. Reportedly, the finance ministry is issuing approval for any defence-related imports. Next in line is petroleum.

If the SBP forex reserves fall below $6 billion, expect rationing in the petroleum imports as well. Already, counterparty banks are demanding confirmation of LCs. The charges which used to be 1-2 percent are now as high as 7-8 percent. Some banks are not entertaining Pakistan’s LCs at all. Others have imposed reduced limits.

There is adverse implication if the petroleum products run short. There would be long lines at petrol stations and the supply will have to be rationed. There would be longer hours of electricity load shedding with no fuel for standby generators. There would be shortages of medicines, food, and other essentials.

The situation could not be much different from what Sri Lanka had been facing in the past few months. However, it increasingly appears that Pakistan may not strictly default on its international debt obligations. That is why Dar’s behavior towards the IMF is callous. And the attitude of a few parliamentarians is oblivious to the ground realities.

Dar and others still have the audacity to play politics. Rome is burning. The political leadership needs to wake up and think beyond its political capital. It needs to impose fiscal consolidation to bring the IMF back. It must increase gas prices and stop dolling out funds to MNAs. It needs to shorten the working days per week and reduce working hours per day to save on power and fuel. Otherwise, the ruling coalition will run out of whatever political capital it is left with.

Copyright Business Recorder, 2022

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Ali Khizar

Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar

Comments

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Muhammad anees Dec 05, 2022 12:03pm
Excellent article
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Fazeel Siddiqui (Overseas Pakistani) Dec 05, 2022 12:53pm
No advise needed by aggressive beggar nation of Pakistan, they want things either free or cheap and please don't ask them to work hard. Political economy what it is called by Darknomics.
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Ali Dec 05, 2022 03:24pm
Writer who is Known Youthiya and is only trumpeting PTIs flawed narrative about the shape of the economy. Ali Khizer has clearly downplayed the inherited economic and fiscal issues and wants to put all the blame on the post VONC incumbents disregarding all the misadventures down by the predecessors of Miftah, Dar, etc. Seems like Tareens, Hafeez, Asad Omer were some kind of geniuses who had done some economic wonders during their share of the loot and plunder of the national exchequer. Shame on the writer and this third grade newspaper which has employed such nin-com-poops like Ali Khizar.
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Az_Iz Dec 05, 2022 06:06pm
Shortening the working days and hours, means less output. Not a good idea.
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Imtiaz Ahmed Dec 05, 2022 06:38pm
@Ali, cat does not disappear by.closing the.eyes. be realistic. This corrupt system will never deliver. Major surgery required. It's not the matter of PTI OR PDM N. IT'S THE MATTER OF IGNORANT 22.CRORES HAJOOM. V
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DR IMRAN KHAN Dec 05, 2022 11:09pm
Ali khizer's worked out report is respected.What we see is TITANIC SINKING SLOWLY AND THE BAND IS PLAYING.A sane mind in country knows all about ways of curtailing the expenses but who will allow them to come to stage?
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DR IMRAN KHAN Dec 05, 2022 11:11pm
Hello
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DR IMRAN KHAN Dec 05, 2022 11:14pm
Why my comment is not being recorded on this forum?
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Usama Dec 06, 2022 01:44am
@Ali, Stuff he wrote is accurate and I, as a market participant can vouch for it. Instead of countering with facts, you called him a "youthia" which goes on to show that you and your kind indeed do blossom in and around the sewer. Try asking a global fixed income desk or Pakistan focused macro analysts and they'll point to VONC and the inept PDM. Those are the universal truths in the "market".
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Amir Ali Dec 06, 2022 07:18am
Great to see someone os explaining the root causes of our ailing economy and its repercussions. But who care its pakistan as long as we gets the perks and benefits we don't care no matter what happens to the country.
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Tariq Dec 06, 2022 09:49am
@Ali, This appears more like a political statement
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Pakistani Dec 06, 2022 10:19am
your analysis is all a recap of the economic developments since VONC, how about you also highlight the way ahead in this situation? or is it just snap elections?
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USAMA BILAL GHORI Dec 06, 2022 12:42pm
Sad Situation, May ALLAH protect our beloved Pakistan from the EVIL Politicians
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Haider Ali Dec 06, 2022 08:43pm
@Az_Iz, well from an economists point of view it will reduce the government expenditure. productivity is a long run priority, cuttings the expenditure is need of the Hour....
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MOHAMMAD AFZAL Dec 07, 2022 08:11am
How much are we paying the Army of Federal Ministers and advisors? How much are we paying to members of Parliament? How much are we paying to Provincial Ministers & advisors? Do they deserve their pays? Pays, Perks & Previlages of "JUDICARY", we can't leave out Military top brass as well. Who is eating up this country? Those who successfully run their businesses around the globe, how can they run down the country into the drain? There's got to be malicious intention or all out conspiracy to bankrupt Pakistan. We only succeed, if Pakistan lives.
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IMTIAZ CASSUM AGBOATWALA Dec 07, 2022 02:11pm
Good article. Finance minister is living in a fool's paradise. His claim that dollar rate will come down to Rs 200 has fallen flat. Austerity at the govt level is the priority. Citizens will follow.
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Syed Saqib Zia Dec 07, 2022 04:34pm
point to be included. stop the fuel allowances of all govt employees. Encourage railway for supply of goods from Karachi to all around the country (1000 of trucks/ day consumed much more fuel rather than one train). Stop the smuggling of locally produce agriculture for example wheat. There is no shortage of wheat in this country. Promote morning culture. Markets and offices to be close by 6 pm. hence fuel saving. Meetings to be done virtually rather physically. working days to be reduced. Complete ban on imported food items, Imported cars, Cell phones (encourage locally manufacturing phone as china did), Imported materials and finished products for construction of houses , plazas, flats. Many other points are there for cost saving, but Politicians are not ready to stand on their feet rather they are enjoying to see the sinking view of this county. They will flew away as their properties and businesses are outside the country
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Abdul Sheikh Dec 11, 2022 07:46pm
@Ali, if you can write and analyze better I promise I pay you more than BR.
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