EDITORIAL: The difficulties faced by businesses in paying for goods and services continue to mount. Murmurings within the banking sector speak of an increase in the cumulative backlog of payments on account of airline and shipping services, dividends to foreign investors and others.
The quantity of reserves with the central bank at this point of time do not inspire much confidence either as they are down to cover import requirements of the country for just over one month as against at least three months that used to be the norm.
As regards the forex reserves, the finance minister has rightly stated that we have been in an even worse position in the aftermath of the nuclear tests that we conducted in 1998 than the present predicament. This, however, does not provide any comfort to the market primarily because of dissimilar circumstances.
In the aftermath of the nuclear tests the country stood united like a rock to make the country’s defence impregnable while today we have a bitterly divided polity that has resulted in a high degree of political instability.
The market expects the Pakistan Rupee (PKR) to weaken further despite a cumulative 900 bps (basis points) increase in the policy rate by the State Bank of Pakistan (SBP) during the last year and a half and losing nearly 21 percent in value during the current calendar year thus far. Furthermore, the widening differential between the rupee in the interbank market, the open market and the rate on offer by the post-Covid-19 resurgent hundi/hawala system that accounts for a steady decline in the remittance inflows which places an ever-rising pressure on the country’s foreign exchange reserves and consequently on the rupee-dollar parity.
The fact remains that the rupee is under considerable stress even though soon after Ishaq Dar took oath as the finance minister end-August the rupee strengthened from 240 to the dollar to under 217 to the dollar – a recovery that is attributed to eight banks ceasing to make windfall profits reportedly; yet yesterday inter-bank rate was 224 (bid) and 225 (on offer). In the open market, however, PKR remained unchanged for both buying and selling against USD, closing at 229.25 and 231.50, respectively. The rates on offer by the hundi/hawala system are not definitively known; however, reports indicate that the differential could be much more than double the difference between the interbank and open market rates.
Foreign exchange reserves had plummeted to 7.8 billion dollars as on 14 November 2022 and restrictions (administrative and exchange) are being imposed to deal with the situation as per the IMF (International Monetary Fund) seventh/eighth review documents. These restrictions are necessary to clear the debt payable by the government (including interest on loans/debt equity as well as payment of principal as and when due) estimated at around one billion dollars in December alone, the dollar payments due in terms of repatriation of profits/on purchases, including credit card payments and travel on foreign airlines, the opening of letters of credit to import essential commodities by local importers as well as foreign Chinese and Turkish companies operating in Pakistan and unable to import basic inputs.
There is little doubt that one reason for the delay in the start of the ninth IMF review talks is the misaligned rupee-dollar parity. An attempt to contain this is reflected in the 100 basis points rise in the policy rate to 16 percent on 25 November; however, what is disturbingly ignored by the current team of economic leaders is that both the discount rate and the exchange rate must work in tandem as monetary policy tools and any attempt to rely on one without the other is a flawed approach.
There is also considerable evidence that the Afghan factor is contributing to the rupee erosion through outflow of dollars on all transactions – be they official government to government or private sector to private sector or from those resident in Pakistan to family members still in Afghanistan. The need to better police our Western borders is therefore of critical importance.
The economic impasse is not just persisting it is actually getting worse and decisions to raise subsidies (the 19.99 rupees per unit of electricity to exporters and the reduction in power tariff for tube wells to 13 rupees) are decisions that would further stall the next disbursement from the Fund, which is critical to enabling the government to access the budgeted and pledged around 35 billion dollars.
Last but not least, that the situation is potently dangerous is a fact. Therefore, our politicians must not lose sight of another fact that with bitterly divided parties government could only be unstable. They must desist from resurrecting old recriminations and bitternesses in order that some point-scoring is attained over an opponent.
Copyright Business Recorder, 2022
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