EDITORIAL: The secretary, Ministry of Industries and Production, while testifying before the relevant Senate Standing Committee stated that he was oblivious of any withdrawal of administrative restrictions on imports to facilitate the industrial sector – a decision noted in the 23 June 2023 circular issued by the State Bank of Pakistan (SBP) stating that in view of the representations received from various stakeholders, it was decided to withdraw all restrictions on imports with immediate effect — a withdrawal that was later revealed to be an International Monetary Fund (IMF) prior condition for the staff-level agreement reached on 29 June 2023 on the 3 billion dollars Stand-By Arrangement.
This withdrawal is unlikely to be implementable in the very short term, defined as less than three months, or even in the short term, defined as less than nine months or the duration of the SBA.
The reason: reserves must be enough to cover at least three months of imports plus repayment of principal as and when due and interest on external loans (until and unless rescheduling has been agreed with debtors).
While the government’s rationale to limit imports to essentials was to conserve the dwindling foreign exchange reserves which plummeted to 2.9 billion dollars on 3 February 2023 that represents less than a couple of weeks of imports, given the rise in the international price of critical imports, including petroleum and products and cooking oil, yet, from the Fund perspective, two economically sound arguments were no doubt put forth: (i) the government had already pledged in the seventh/eighth review dated August 2022 that it would end these administrative measures by 30 June 2023, the scheduled end of the Extended Fund Facility programme with the Fund arguing at the time that “greater reliance must be placed on exchange rate flexibility as a means to address the balance of payment pressures;” and (ii) ending these measures would automatically lead to the abandonment of the disastrous policy to control the external value of the rupee which generated three rates — an interbank rate that was controlled, an open market rate that limited the amount of dollars that could be purchased and a grey market rate at which dollars were available.
The widening differential between the interbank and the grey market led to not only a resurgence of the hundi/hawala mechanism, thereby leading to a 4 billion dollar decline in official remittance inflows in 2022-23 but also accounted for a dearth of dollars in the market that would allow for unimpeded import inflows.
There is no doubt that the staff-level agreement on the SBA led to 2 billion dollar deposits from Saudi Arabia with pledged deposits from the other two friendly countries, notably China and the United Arab Emirates to follow.
It is, however, not yet clear what are the terms of the deposits and whether a possible rollover will be linked to yet another IMF programme. In addition, pledges by other multilaterals and bilaterals will now be disbursed and the 1.3 trillion rupees budgeted borrowing from the foreign commercial banks would be on better terms with respect to the amortization period and the rate of interest.
Although all these inflows will raise the level of foreign exchange reserves, yet, we would add a word of caution to the incumbent government, the caretakers that are to follow and the next elected government if elections are held before the end of the SBA: the strengthening of the reserves is on the basis of external borrowings, which are increasingly attached to politically extremely challenging conditions that reflect the erosion of patience by multilaterals and friendly countries over the sustained failure of past and current administrations to implement structural reforms that may end the rising reliance on foreign borrowing.
And to add to this dismal picture is the erosion of forbearance of the general public as donor supported reforms focus on raising tariffs, or passing on the buck onto the hapless consumers, rather than to implement reforms that envisage a long-term solution to inefficiencies of various sectors, most notably the power, fuel and state owned enterprises.
Copyright Business Recorder, 2023