Increasing bank lending should to be the next move. The ratio of advances to deposits should increase from present 44.7% to almost 60%. To generate liquidity, it would be prudent to progressively reduce GOP holdings (T/bills-Bonds-Sukuk) to less than Rs 15 trillion. Thirdly, an OMO injection of Rs. 5 trillion should be assigned to banks for the corporate sector in order to meet the 60% bank lending target.
If not, there doesn’t seem another way to completely restructure the system.
Growth rate
The best estimate is roughly 2% because I want to stick to the predicted numbers from the foreign donors. Because of the repeated delays in receiving planned funding inflows over the past five years, including the last one that almost brought the economy to the brink of default, it is very difficult to assess the growth rate.
Getting IMF approval has become the biggest challenge in recent years. Unlike the previous 22 times, this time around (the 23rd time), it is increasing difficult to receive approval for disbursement of its quarterly tranches unlike the past when the IMF used to easily and frequently grant waivers. The IMF has taken a fundamentally different stand in recent years.
As a double whammy, donor positions are changing at the same time as the geopolitical landscape is shifting. Lenders’ attitudes have clearly changed. Pakistan’s economy is sensitive to these kinds of shocks because of the abrupt change in their attitude and behaviour. Another important component is the help of bilateral and multilateral organisations, since Pakistan cannot afford to wait to receive the financing that would otherwise cause a mismatch in its cash flows.
But the other important factor was the past generation’s bad economic policies. To fulfill and complete the goals set by the IMF, the newly- elected government’s economic policies will be crucial. This can only be done by making good use of its tax and fiscal policies to impact the economy. As a major policy state entity the State Bank of Pakistan is responsible for protecting stability by using monetary policy.
Inflation and currency in circulation
Currency in circulation and inflation are two crucial aspects of the economy that are interrelated. One of the main reasons for the ongoing economic turmoil in the world is the Russia-Ukraine conflict. The geopolitical issue that resulted in rising finance costs, declining living standards, and increased debt stress has been made worse by the conflict in the Middle East.
The outcome has been a very high level of monetary policy tightening, which is causing harm to growth and corporate confidence and activity.
Despite this, the government’s administrative actions and central banks’ monetary policies have caused a substantial decline in inflation across the world.
However, in Pakistan, the absence of fiscal adjustments and economic reforms is undermining monetary tightening and eroding its effectiveness. The amount Rs 8.6 trillion as currency in circulation indicates that the size of the undocumented economy has expanded at pace identical to that of inflation.
When buying products and services, cash is frequently used in Pakistan. Real estate transactions that are not fully recorded at market value serve as one common example. It only costs or reports half of its worth to the tax authorities. The remaining amount is either paid out in cash or deposited into a bank account. Most of these transactions are not disclosed to the tax authorities.
A number of other high-value transactions are carried out with cash or via bank accounts, many of which are avoided and not documented or reported. The tax to GDP ratio will never rise to the intended levels of 15% or 20% level with indirect tax collection contributing to inflation and harming a sizeable portion of the population.
The decision to tax all incomes and lessen the burden of indirect taxes will help those with low incomes and will also contribute to a decrease in inflation. By taking these steps, the ratio of savings to GDP will rise, and the ratio of cash in circulation to bank deposits will fall. The much-needed tax to GDP ratio is going to increase. Reducing the inflation rate is a difficult task because of external as well as internal factors.
Given the circumstances, inflation is predicted to reach 24% in the current fiscal year. Towards the end, it should ease up by 15% to 18%.
Pak rupee @ 281.8607
Following the IMF’s staff level agreement that resulted in inflows from both bilateral and multilateral sources, the Pakistan Rupee has remained stable in recent months. The Rupee’s future trajectory will be heavily influenced by a number of other variables, such as keeping the SBP Forex Reserves at $10 billion. To deal with the balance of payments and the current account deficits it would help to keep the Real Effect Exchange Rate (REER) below the 100 benchmark. And perhaps more crucially, for the rate at which foreign funding arrives in Central Banks kitty. While a precise figure would be impossible to predict, a 5 to 7 percent move in either direction seems right under typical circumstance. Provided the economy stays stable only then will PKR gain.
SBP policy rate of 22%
The borrowing costs may not significantly decrease during this time if the inflationary tendency continues to be high and if the predicted inflation rate by the end of the fiscal year is 24%. Although opinions may differ, it is the duty of SBP to uphold price stability and encourage expansion in order to create jobs.
The asset purchase (OMO) injection by SBP, which has risen to the record high of Rs 10 trillion, is a not widely understood phenomenon. Due to money being invested in government paper, it is in defiance of the excessively tight monetary policy that also prevents banks from lending to the private sector and does not boost the economy.
Considering the above data, the SBP may reduce the policy rate by 100 basis points in the current fiscal year and by 200 to 400 basis points in the first two quarters of the following fiscal year, provided the rate stays within the 15% to 18% inflation goal until December 2024.
A few facts and risk indicators
Pakistan survived a difficult phase following the IMF (SBA) approval in the middle of 2023. However, this is a recurring event. Economic discipline will be the primary emphasis going forward in order to secure a quarterly IMF tranche and external funding from other sources. The average monthly finance requirement for smooth cash flow is roughly $ 3 billion.
In this fiscal year, Pakistan aims to collect Rs 9.4 trillion in taxes, with the possibility of increasing that amount to Rs 11 trillion in the upcoming fiscal year. Thus, the tax to GDP ratio will be approximately 9.8% based on a 2% growth rate. In order to achieve a 10% rate, PKR must be stable.
The bank advance to deposit ratio has decreased to 44.7% from 48.40% on December 2022. It is a reliable predictor of the uneven and sluggish growth of the economy.
Increasing the county’s credit or risk rating is another significant task. After the elections, political stability is likely to be beneficial.
Yet among the most pressing issues that still need to be tackled are GDP growth, budgetary restraint, debt restructuring, better trading conditions, and stable macroeconomic policies.
ECONOMIC BURDEN (estimated) vs. LAST YEAR
-SBP FX Reserves $ 7.758 Billion vs. $ 5.82 Billion (improved)
-Int’l Reserves/Foreign Currency Liquidity (Derivatives) $ 2.987 Billion as opposed to $ 4.17 Billion (improved)
-External Debt and Liabilities $ 128.09 Billion vs. $ 127.18 Billion (Likely to rise)
-Domestic Debt Rs 41.03 Trillion against Rs 33.24 Trillion (bank lending is hampered)
-Currency in circulation Rs 8.6 trillion against Rs 7.79 Trillion (Higher due to inflation, tax evasion & undocumented economy)
-Open Market Operation (OMO-injection) Rs 10.079 trillion vs Rs 5.18 trillion (in defiance of SBP policy rate)
-Credit to private sector, given the OMO injection amount is Rs 10.07 trillion and the bank lending to deposit ratio is 44.7% to the private sector of Rs 40.9 billion in negative is (quite concerning).
Unfunded Debt Rs 2.81 trillion
Versus Rs 3.11 trillion (improvement)
Tax-to-GDP
10% against 9.8% (estimated FY24 end) is a big growth hindering factor. Tax every source of income.
(Concluded)
Copyright Business Recorder, 2024
(The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper)
He tweets @asadcmka
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