When no one, including the finance minister, is willing to fix the economy

ISLAMABAD: Pakistan is once again facing a frightening balance of payment (BOP) crisis that needs to be carefully tackled to avoid a default-like situation.

There is a growing consensus that the much-needed macroeconomic stability could not be achieved during the last four years during which economic woes exacerbated as no home grown or any international financial institution-prescribed short- or long-term programme could be fully implemented to achieve desired results.

The issue compounded when the economic team, led by Finance Minister Ishaq, remained clueless to urgently find out the solution of the serious BOP problem except to claim that there is no default like situation and that the government will manage to pull through 2017-18 financial year.

This is perhaps the first time that some government officials and independent economists are on the same page to conclude that the country needs a minimum of $20 billion in 2017-18 to escape default on the repayment of debt. They agreed that decrease in exports, home remittances and Foreign Direct Investment (FDI), coupled with declining foreign inflows, has resulted in the BOP position turning serious.

Economy ‘underperforming due to political influence’

Since no strategy has been devised to deal with the issue, the government seems unprepared to look for new ways. It is only banking on floating $2-3 billion Sukuk and Euro bonds to survive till March next year.

But by that time, foreign exchange reserves will come down close to $8 billion, which are not considered sufficient for one-and-a-half months’ import cover.

The finance minister, who is facing new investigations and supposed to be appearing in the accountability court, believes that there is no need to go to the IMF for any emergency assistance. But those who are in the know of things maintain that Fund officials are reluctant to negotiate any new bailout package with the government which has to last only for four months.

They would not even talk to the caretaker government because it will not have any mandate to implement any proposed reforms that are feared to be full of strings and conditions. The IMF is believed to have decided to send its mission to Pakistan in December to gauge the current macroeconomic situation. Till then, there is no hope Pakistan can get the desired level of foreign inflows to manage its unwarranted financial affairs.

The current precarious reserves position speaks volumes about their vulnerabilities especially the way $4 billion were consumed by the government in just last 3-4 months.

The central bank’s $12 billion reserves also contain close to $4 billion borrowed from the commercial banks. Ironically, both the State Bank of Pakistan (SBP) and commercial banks are showing these $4 billion in their separate accounts. Taking into account reduction in reserves, one would be shocked to know that foreign inflow remained minus one dollar during the first quarter of the current financial year compared to $800 million in the corresponding period of 2016-17.

FDI, which is one of the major components to measure GDP growth, has gone down drastically except that of China while foreign investors and bilateral creditors besides the International Financial Institutions (IFIs) led by IMF are not forthcoming to help the beleaguered PML-N government.

The United States is no more disbursing funds under the Coalition Support Fund (CSF) and in fact, has attached strings to offer such assistance which is otherwise reimbursement on account of Pakistani funds spent on restricting war on terror.

There are indications that the government would only be managing $10 billion from all external sources including those of the foreign commercial banks and that too, on high mark up. The rest of the $10 billion, out of $20 billion needed for 2017-18, are unlikely to be collected which would cause problems in making debt repayments.

The situation gets further worsened due to the flight of capital worth $200 million from the stock market during the first three months of the current financial year. The government’s financial difficulties further multiplied as the regulatory duty on imports of 731 items ranging from 5 to 80 percent is not expected to yield results in terms of collecting sizable taxes.

Since the bulk of the imports are being made from China, the Chinese government is believed to have refused to allow the imposition of regulatory duty because of the Free Trade Agreement (FTA) between the two countries. The government has reportedly been told that imposition of regulatory duty on imports from China will be a flagrant violation of the FTA and that it must be reviewed to avoid problems between the two countries.

Political turmoil may harm national economy

This is in that backdrop that the government has been advised by its well-wishers to adopt a “broad trend” to review its October 16 decision to introduce a minimum import price like that of sugar to allow only critical imports and effectively discourage non-essential imports that have more than doubled to over $54 billion compared to declining exports now standing at $20 billion.

This import price, it is said, has to be maintained and brought done at 50-60 percent as the decision of imposing new regulatory duty is not going to work to discourage unnecessary imports.

On the export front, poor exporters need to be supported by paying back their over Rs200 billion sales tax refunds. Since these exports are considered a lifeline for augmenting foreign exchange reserves, the government, like Bangladesh, should convert duty drawbacks into cash incentives to be reimbursed by the SBP through banks and not through Federal Board of Revenue (FBR).

It must be ensured that banks do not indulge in delays so that exporters improve their poor liquidity position to meet timely export orders. Since there is no mechanism to check unnecessary imports, there has been a 63 percent, 62 percent, 61 percent, 63 percent, 41 percent and 39 percent increase in import of iron steel, electrical goods, telecom equipment, textile items, motor cars and palm oil, respectively. Also SBP interest rates must be reviewed as they are only helping to increase imports and provide a big opportunity to importers to stock their items to earn more and more profit as and when required.

Overvalued exchange rate is causing massive speculations and helped speculators build up their inventory by $1 billion in their foreign currency accounts. Dollar market rate of up to Rs108 billion may go up to Rs110 very soon if there is no intervention by the central bank.

It is high time the government should make necessary adjustment as profit on repatriation have increased by almost 30 percent while the appreciation of dollar has caused 25 percent profit on home remittances that are mostly coming through infamous “hawala and hundi” due to Rs3-4 percent better rate than inter-bank rate.

Will the government act to address the key challenges to improve its BOP position? Apparently nobody seems to be interested to fix the economy.

The writer is the recipient of four national APNS awards and four international best journalistic awards

Published in The Express Tribune, November 6th, 2017.

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