EDITORIAL: The writing on the wall has been made clear multiple times in recent months to the incumbent 11-party coalition government: put your own house in order or else face International Monetary Fund (IMF) programme deferral at best, cessation at worst, that would remove the comfort level of other creditors that Pakistan is embarked on a reform agenda designed to steadily lower dependence on foreign borrowing.
This sentiment was echoed by UK Minister Andrew Mitchell during the flood conference co-hosted by the United Nations Secretary General held in the second week of this month while pledging 9 million additional pounds for the flood victims; and more recently by the Saudi Minister for Finance Mohammad al-Jadaan during the World Economic Forum at Davos: “we used to give direct grants and deposits without strings attached and we are changing that.
We need to see reforms. We are taxing our people, we are expecting also others to do the same, to do their efforts. We want to help but we want you also to do your part.”
In this milieu the coalition government not only continues to dither in taking decisions on the required prior actions but persists with the multiple exchange rate regimen with an ever-widening differential between the interbank controlled rate and the rate at which dollars are actually available on the market – a policy that has led to a one billion dollar decline in remittance inflows during the first six months of the current year, made imports very expensive thereby fuelling domestic inflation with exporters opting to bank their proceeds outside the country on the expectation that the interbank rate would eventually have to be brought to a level that is a reflection of our balance of payments position, foreign exchange reserves and any other macroeconomic factor that needs to be taken into consideration by the central bank under the market-based exchange rate mechanism agreed with the Fund on 12 May 2019.
In this context, it is relevant to note that the seventh/eighth review’s success with disbursement of the tranche in early September 2022 indicates that the Fund was satisfied at the time that all prior conditions were met, including the exchange flexibility. That the issue arose subsequently needs to be addressed urgently and it is hoped that the State Bank of Pakistan (SBP) responds appropriately as it was granted autonomy by parliament in January 2022.
Notwithstanding the daily multiplication of economic woes that face the country’s treasury as well as the challenges facing the general public in making ends meet with the value of each rupee earned rapidly eroding on almost a daily basis, the coalition government continues to dither — a stance that is inexorably taking this country not only towards the looming threat of default but also opening the floodgates for severe shortages of essentials, a negative growth rate with a growing army of unemployed and last but not least an untenable inflation rate that would be more than double what is being projected if the IMF ninth review is declared a success.
We hope that better sense would prevail on two extremely critical counts. First and foremost, the lack of exchange flexibility must be acknowledged as a major deterrent to not only the start of ninth review negotiations with the Fund but claiming inflows, other than rollovers — that do not add to the present 4.3 billion dollar foreign exchange reserves, less than three weeks of imports, but merely postpone repayment, from friendly countries is simply wishful thinking.
And secondly, the administration has no one to blame but itself for burying its head in the sand instead of dealing with the situation heads on, which is the need not of the hour but, more urgent, of the minute if not the second.
The present policy is clearly aimed at containing the twin deficits (fiscal and balance of payments) by simply slowing the growth through curtailment of imports and not adjusting the exchange rate in tandem as currency devaluation would increase the fiscal deficit.
However, the fiscal deficit is increasing because more than 50 percent of FBR (Federal Board of Revenue) revenue comes from imports and shrinkage in imports has had a negative impact on revenue collection. It needs to be recognised that there are linkages within the economy and it cannot be fixed through an accountancy approach of sprucing the balance sheet.
Copyright Business Recorder, 2023
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