EDITORIAL: Pakistan’s economy is in a tailspin notwithstanding repeated claims to the contrary by Finance Minister Ishaq Dar. Dire prognosis by independent economists as well as the opposition are being dismissed as politically motivated by government stalwarts to the further detriment of the economy - a prognosis based on empirical data routinely released by the Pakistan Bureau of Statistics (PBS) and the State Bank of Pakistan (SBP).
Foreign exchange reserves were barely sufficient for a month of imports at 4.3 billion dollars as on 6 January 2023 and with passage of time, with home remittances and export proceeds declining, the reserves’ situation will further worsen.
There has been no inflow of assistance in spite of significant pledges by the three friendly countries - China, Saudi Arabia, and the United Arab Emirates. Pakistan’s civilian and military leadership have been making hectic diplomatic efforts in recent weeks to secure these disbursements but to no avail.
The reason as unambiguous as the writing on the wall is that pledges will be disbursed only if the government stays on the International Monetary Fund (IMF) programme or, in other words, the mandatory ninth review, originally scheduled on 3 November 2022 and still pending, must be a success.
This prerequisite to the release of pledged assistance was made to the Fund by friendly countries notably that they would not only roll over all loans till the end of the programme (scheduled for end June this year) but would also extend additional assistance of 4.2 billion dollars subject to the country remaining on the IMF programme. There is, therefore, no other option but to stay the Fund programme course.
The eleven-party coalition government signed off on the seventh/eighth review by mid-August and by the first week of September the IMF board gave formal approval for disbursement of the tranche.
It is therefore patently clear that Pakistan was on course to get the next tranche released latest by end-November if it had implemented the prior conditions agreed in August last year. But instead of implementing prior conditions Ishaq Dar began to reverse pledges made earlier to the Fund during the previous eight reviews. The first policy reversal was to abandon the market-based exchange rate.
At present, paucity of dollars with the SBP militates against the 2014-17 policy of artificially shoring up the rupee’s market value through sale of dollars that were incidentally procured as loans.
It is, therefore, little wonder that the disparity in the three prevailing rupee dollar rates on the market - controlled interbank, formal open market and informal open market at which dollars are actually available - has been widening since October 2022, which accounts for the failure of the government to help provide sufficient dollars to legitimate importers of essential items (that include cooking oil and raw materials for the manufacturing sector) to open letters of credit without hassle.
Additionally, this discrepancy has directly contributed to a fall in remittance inflows, by one billion dollars in July-November 2022 as opposed to the comparable period of the year before, with overseas Pakistanis naturally preferring to remit through hundi/hawala that offers 35 to 40 rupees more per dollar.
There is, therefore, an urgent need to reverse this policy if the Fund package is to be restored. To date, there has been no serious attempt to backtrack on this disastrous policy. The pledge that the government will be facilitating exporters to import hassle-free the required raw materials is yet to translate into action.
The government on 6 October also extended a 110 billion rupee unfunded electricity subsidy to exporters which was declared a regressive measure by the IMF and it is highly unlikely that the Fund would agree to declaring the ninth review a success with this subsidy continuing.
The finance minister to-date has focused on raising revenue as a means to create leverage with the Fund – a leverage that he intends to use to ease some of the harsh upfront conditions, particularly power sector reforms, that require raising tariffs.
There is talk of a ‘flood levy’, and raising indirect taxes on other items, including cigarettes, withdrawal of exemptions as well as not releasing the authorized amounts for Public Sector Development Programme. These measures would certainly curtail the budget deficit.
It is patently clear that the Fund, based on its insistence on Pakistan adhering to all the agreed conditions during the first eight reviews, is, therefore, unlikely to agree to fiscal measures alone to release the next tranche.
And the economic team must realize that given the paucity of foreign exchange reserves it is also unlikely that going back on the Fund programme will pre-empt the need to seek another programme almost as soon as this one is over.
Copyright Business Recorder, 2023
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