The macro numbers are not showing a good picture. Inflation is creeping up again. The current account posted a deficit last month to eat up all the surplus of the previous few months.
The fiscal deficit is much higher than the target. And the sequential outcome is that the currency is depreciating again especially when the monetary policy is accommodating and disregarding inflation, currency movements and other macro imbalances. Maintaining macroeconomic stability will not be an easy job for caretakers.
With the IMF (International Monetary Fund) programme in place, SBP (State Bank of Pakistan) is bound to clear the import backlog, and that will result in an uptick in imports and slippages in the current account.
Moreover, the lackluster performance of remittances is making the deficit even uglier – and the remittances are down due to a new wave of dollarization as people are expecting currency to depreciate with imports relaxation, unabated use of informal means to fund smuggled imports, and net negative investment by expats in the real estate.
The crux is that there is no respite to dollarization without the IMF, and then there are concerns with the IMF. The only way to move towards a corrective path is to deal with persistently high fiscal deficit and that is the hard nut to crack.
Last week’s highlight is slippage in the current account deficit which rose to $800 million in July 2023, after posting surpluses for four consecutive months. The primary reason is the resurgence in imports, which have crossed $4 billion mark for the first time during the calendar year. Interestingly, the oil (petroleum group) imports last month were the lowest since the COVID lockdown.
The so-called non-essential imports’ (non-oil and non-food) bill is mainly jacking up. It reflects that the current account slippage is mainly due to clearance of backlog of imports and growth in imports such as automobiles. And with petroleum imports normalizing in the coming month at a time of increasing prices, the current account deficit shall remain high.
The biggest jump in imports is the category of $645 million ‘via-nonbanks’– it is almost triple of last six months’ average. These are imports on contracts. There are two types of import contracts that mostly took place over the last year when imports were restricted.
One was between foreign companies operating in Pakistan with their parent and sister companies abroad – for example Pak Suzuki was importing car CKD kits, VIVO importing phone CKD kits and MNCs in FMCG sector importing raw materials. The other type of contracts began after SBP allowed imports on deferred payments (up to 365 days) in December 2022.
Now the chickens are coming home to roost, and these payments may continue to keep pressure on currency in coming months, and would keep current account in red. Then there is another wave of payments putting pressure on the currency, which is not reflecting in the current account. That is about the backlog of dividends of foreign shareholders of local companies. These unpaid dividends are reflected in FDI in the financial accounts of balance of payments. And FDI may become negative in coming months.
With these backlogs, and recent rise in the international oil prices, it’s imperative to check the demand to keep current account manageable and preserve the SBP reserves, and more importantly to arrest rising inflation.
With Ishaq Dar no longer in the control seat, one would expect SBP to be independent and prudent. The caretaker finance minister (who was known as a hawk during her time as SBP Governor) is insistent that she would not encroach on independence of monetary policy committee (which in fact was first formed when she was the Governor).
Let’s hope SBP shall make a decision in the coming monetary policy meeting in September on merit.
The finance minister is required to bring much-needed fiscal discipline – which is the core of the problem. Not an easy job. To start with, the caretaker minister should focus on enhancing the digitization of transactions which was happening until 2022 before the regime change, and to work on rationalizing expenditure where the role of provinces comes into play which is a very difficult task. A tall order for an officeholder only in place for four to six months, at best. Will the interim finance minister be able to make it happen? Fingers crossed.
Copyright Business Recorder, 2023