The economically disastrous policy of controlling the interbank rate thereby providing stimulus to the black market, a policy with not a single tentacle rooted in any documented economic theory, has finally been abandoned after nearly four months of sustained hemorrhaging estimated to have cost Pakistan and its 220 million citizens at least 4 billion dollars.
The loss can be itemized on two counts. First, data released by the State Bank of Pakistan (SBP) indicates that July-December 2021-22 total remittance inflows, a desired form of foreign exchange earnings, were 15.807 billion dollars while in the comparable period of 2022-23 remittances declined to 14.052 billion dollars – or a loss of 1.75 billion dollars.
The figure for January 2023 is not yet available but one may easily project approximately 200 to 300 million dollars of lower remittance inflows compared to January 2022. In other words, conservative estimates place the loss in remittance inflows for the first seven months of the year at a minimum of 2 billion dollars, which does not take account of the 24.5 percent Consumer Price Index (CPI) for December 2022, against 12.3 percent in December 2021, that may have necessitated higher remittance inflows.
The decline in remittances is mainly if not entirely attributable to the differential of more than 40 to 45 rupees per dollar between the interbank rate and the rate available through the illegal hundi/hawala on Wednesday, the last day before this policy was finally forsaken.
True that the massive rise in remittance inflows during the past two years owed less to the trust reposed in the honesty of former Prime Minister Imran Khan, a claim he consistently made, and more to the global lockdown in the aftermath of the pandemic that effectively crippled the hundi/hawala system, yet instead of working to keep overseas Pakistanis satisfied with the official channel the incumbent economic team leaders have inexplicably done the exact opposite thereby not only making all previous efforts to lure overseas Pakistanis to remit money through official channels redundant but it would now require a Herculean effort to restore their trust.
Second, what was ignored at best, not understood at worst, was that an overvalued interbank rate against a thriving black market rate, may reduce export earnings as it is no longer makes economic sense for the exporter to convert all foreign currency earnings into Pakistani rupees; additionally, there would also be a negative impact on foreign investment inflows – portfolio and direct.
The deliberately overvalued interbank rate coupled with administrative measures accounts for repeated warnings by foreign investors including those operating under the China Pakistan Economic Corridor, still considered the only major source of foreign investment, that unless they be allowed to open letters of credit to import inputs/raw materials and repatriate sufficient funds to repay loans in their home country there will be shortages and/or litigation.
To compound the folly of an overvalued interbank rate, the government decided to extend an unfunded 110 billion-rupee subsidy to exporters while continuing administrative measures curtailing imports that, in turn, have crippled exporters capacity to import raw materials to sustain production.
Significantly, it was the reversal of the inane policy to control the interbank rate, not the upgrading of electricity and gas tariffs and the upping of the petroleum levy, that was the major lacuna in the start of the ninth review talks with the International Monetary Fund (IMF) as on Thursday, the same day that the interbank rate was allowed to depreciate, the Fund announced the arrival of its mission on 31 January.
The question is why did the two incumbent economic team leaders — Finance Minister Ishaq Dar and Governor State Bank of Pakistan Jameel Ahmed — resist adopting a market-based exchange rate at such a high cost to the economy? Market based exchange rate is not a free float but, as per the IMF website, a central bank, without a specific exchange path, exercises its judgment based on the prevailing key macroeconomic indicators like the balance of payment position and foreign exchange reserves. The reason why that judgment was not exercised earlier is two-fold.
An overvalued rupee understates the budget deficit. Estimates indicate that each rupee loss in terms of the dollar would raise the country’s debt stock by 130 billion rupees and with the rupee loss of over 30 rupees, and continuing, the addition to debt payments would have risen by 3.9 trillion rupees – higher than the 2.5 trillion rupees of energy circular debt, nearly 36 percent of budgeted tax revenue for the year. Thus the onus on the Ministry of Finance to cut expenditure and raise revenue would be all the greater.
Secondly, reports suggest that Ishaq Dar was specifically tasked to strengthen the rupee on his return, an objective that the party leader Nawaz Sharif has consistently cited as his government’s priority and often refers to the overvalued rupee during his tenure in 2013-17 as an achievement. What Sharif fails to understand is that the rupee value during 2013-17 was premised on factors that are not in evidence today.
Foreign exchange reserves during 2013-17 were not a source of concern though more than 50 percent were in the form of debt, which was possible due to geo-political and not domestic economic considerations. Dar, to keep the rupee value artificially high at that time, used these reserves unwisely and released dollars on the market. Today reserves are 3.67 billion dollars, less than a couple of weeks of imports and no one, not the friendly countries and not the multilaterals, is willing to extend loans to Pakistan until and unless the government remains on a strictly monitored IMF programme.
One cannot lay the entire blame on finance minister Dar; however, given that parliament passed the SBP autonomy amendment bill in January 2022 and it stands to reason that without the Governor SBP being in the loop this state of affairs would not have been possible. But the buck does not stop with the Governor SBP, nor with the Finance Minister. It does not stop with the PML-N supremo Nawaz Sharif either.
The buck stops with Prime Minister Shehbaz Sharif and one would hope that he not only lays responsibility where it is quite obviously due but also determines whether the current team is the best team to negotiate on the ninth review.
Copyright Business Recorder, 2023
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