EDITORIAL: The US dollar has gained in strength in the inter-bank market as well as in the foreign exchange kerb market that reflects partly the negative sentiment in the market that is attributable to the ongoing political uncertainty but more importantly to the cessation of pledged external assistance from multilaterals as well as bilaterals (friendly countries) that are contingent on the success of the International Monetary Fund’s (IMF’s) seventh review.
On 10 March 2022, nine days after the announcement of the then Prime Minister’s relief package, the then Finance Minister, Shaukat Tarin, stated: “the IMF should not worry about it as neither we will take any loan nor increase our fiscal budget to manage the subsidy, but the required money would be managed by diverting dividends from shareholdings in state-owned enterprises (SOEs), cutting development funds from Public Sector Development Programme (PSDP), and additional revenues collected during current fiscal year, while some of the funds would be diverted from Ehsaas Programme.”
Eleven days later on 21 March, he claimed that his final meeting with the Fund staff was scheduled for the next day and revealed that “first they (IMF) agreed that the financing for such a relief package is available through the provinces and SMEs and secondly now they are verifying whether these agreements exist or not.” It stands to reason that this was not corroborated accounting for a 24 March statement by the IMF’s Director Communications stating that “I don’t have the details on the specifics (about Pakistan) you were asking about.
But I would characterize those discussions right now as constructive to reconcile, you know, the key objectives, in fact, to try and meet the key objectives of the programme of fiscal prudence, external sector viability, due protection of vulnerable groups from high international energy and food prices.”
This status quo remains to this day and charges of a delay by the Shehbaz Sharif-led government due to its failure to take urgent politically challenging economic decisions, foremost amongst which is the withdrawal of the 28 February relief package, have become the norm.
What is being ignored are two associated foreign policy initiatives taken by the incumbent government that would strengthen the hands of the country’s economic team: (i) the official visit by the Prime Minister and his team to Saudi Arabia on 28 April, two and half weeks after taking oath, where pledges of roll over/additional assistance/deferred oil facility were reportedly made contingent on the success of the seventh review; and (ii) Foreign Minister Bilawal Bhutto-Zardari’s visit on the invitation from US Secretary of State Blinken to attend the Global Food Conference with subsequent optics between the two showing a cordiality that had not been evident during the past three years. There is speculation that help may have been sought to convince the Fund to phase out its harsh upfront programme signed by the previous administration. If these foreign policy initiatives are successful then the seventh review success is perhaps imminent with phased out reforms in the energy and tax sectors though there is a general consensus that the Fund is not likely to back down from its demand to withdraw the relief package. Once the Fund programme is restored, it is to be expected that other multilateral and bilateral assistance/rollover will imply net inflows as opposed to net outflows today that in turn would strengthen the rupee.
The second measure that would strengthen the rupee is to contain the trade deficit through reducing imports. It has been reported that the government is considering an outright ban and/or massive rise in regulatory duties of those items that are consumed by well-to-do people. This too is a measure that would reduce the need for dollars and therefore strengthen the rupee. It must be borne in mind that remittance inflows have risen dramatically during the past three years and one would hope that measures to ensure that these inflows are sustained remain in focus.
And finally, there is the need to contain the budget deficit that is expected to surpass the unsustainable 9 percent of GDP mark for the current year — a factor that is fuelling the rupee erosion. This exercise, under the purview of the Ministry of Finance, appears to lack appropriate attention so far. True that the Finance Minister has requested the Federal Board of Revenue to widen the base and raise collections and granted that he may be reticent in making any serious move towards containing the deficit before the deal with the Fund is struck; however, one would have hoped for some leadership and out of the box thinking in not only curtailing expenditure but also raising revenue. Hopefully, this concern would be promptly dealt with by the economic team.
Copyright Business Recorder, 2022