Foreign exchange crisis continues

The current shortage of dollars in Pakistan is unprecedented and even more problematic issue is that the situation is showing no chance of improving.

The shortage of dollar syndrome started taking shape in 2022 and it went from bad to worse despite many actions taken by the coalition government and currently it appears that it may not be possible to procure enough dollars to continue with resuming normal import requirements.

Curiously, the shortage of dollars have not caused much of dent in the value of rupee and it is made to stay stable primarily due to the insistence of the incumbent finance minister to keep its value tightly controlled.

This policy of keeping the rupee artificially stable is widely criticised but since the finance minister is considered a vital member of the political party that holds the majority weight within the coalition government.

Many analysts are also of the opinion that the coalition government is deliberately letting the shortage of dollars to continue as it expects that it will make inroads in the grey market that may feel the pressure ultimately and may gorge out the dollars it has hoarded.

It could not be mentioned with certainty that how much dollar flow will Pakistan’s way in 2023 but the expected flow will only enlarge Pakistan’s outstanding external debts and increase its yearly debt servicing requirements as this new inflow would mostly come through obtaining further loans.

It is very clear that this self-defeating and short-sighted solution will further weaken the future economic health of the country. The very fact is that there appears no apparent hope that the country may radically increase its exports of goods and services and provide alternative to the need for foreign reserves.

The situation may further be exacerbated due to declining trend in remittances that have already revealed a marked tendency to decrease and it is widely predicted that the trend
may continue. The troubled economic position of the country may also discourage overseas direct investment that may also depress economic activity.

Reserves have been in sharp decline with analysts fearing that high inflation and low industrial output in the months ahead as production is being squeezed due to the unavailability of imported raw materials.

In the meanwhile, manufacturers complained that banks were not even processing $1,500 payments for the import of spare parts resulting into bringing the entire supply chain to a standstill.

It is pointed out that large-scale manufacturing has shrunk for three consecutive months, and several companies, including Indus Motor, Pak Suzuki and Nishat Chunian, have partially suspended operations in recent months.

The paucity of dollars is impacting almost every field of economic activity and is brought to fore by value-added textile sector that is protesting strongly against the closure of textile factories due to being deprived of necessary imported raw materials.

The sector also vociferously complained that their letters of credit worth as low as $5,000 are being refused and that they are simply unable to continue their manufacturing.

Textile is rated as the highest earner of foreign exchange and its products are the primary exports of Pakistan. The textile industry is not alone in protestations as importers of pulses and manufacturers of cooking oil and ghee cannot lift import consignments of pulses and edible oil from customs’ bonded warehouses as banks keep delaying import payments.

These edible items are mostly consumed by the lower sections of the population and their shortage may add to their woes as they are already under tremendous financial distress.

The dollar shortage is also causing poultry farmers to continue to wait to lift imported poultry feed from the port as their letters of credit are not being cleared.

Chicken meat is the cheapest meat available to the common people and import restrictions on the chicken feed has already jacked up its price and the way the prices are going up chicken meat may soon get out of reach people.

Another difficulty pertains to the pharmaceutical and health industries that are unable to
buy enough dollars to repatriate abroad for obtaining the required ingredients for medicines and medical equipment. In addition, many people are unable to send money for supporting the medical expenses of their relatives.

It is also pointed out that many Pakistani students are not provided with required funds to cater to their educational needs abroad.

One of the most difficult issues is the gap between the official interbank and the effective open market exchange rates that has risen to Rs.30 per dollar as the SBP artificially holds interbank exchange rates in a narrow band by restricting imports and other foreign exchange outflows and this increase is atrocious as before this dollar crunch the normal gap ranged between 2 to 3 rupees per dollar.

On the other hand, dollar smuggling to Afghanistan continues amidst an ongoing crackdown against it by law enforcement agencies and customs authorities.

Massive hoarding of dollars as a store of value also continues in anticipation of a looming depreciation in the rupee’s value.

Under tremendous pressure, the State Bank of Pakistan (SBP) has relented a bit and has lifted curbs on the imports of several essential items required as raw material earlier this year. However, several associations across different sectors have complained that the non-opening of letters of credit (LCs) is creating shortages with several companies suspending operations in recent months.

These protestations have compelled the governor SBP to explain that the move to restrict imports was essential for national economy adding that banks were directed to prioritise the opening of LCs for imports of food, pharmaceutical items, oil, agriculture-related items and raw material required by export-oriented industries.

SBP emphasised that the banks could facilitate the rest of the sectors if they had liquidity and this process is not succeeding currently as the country do not have dollars available locally.

The SBP pointed out that remittances, export proceeds and foreign loans help build the State Bank’s capacity to support businesses and that it is focusing on its capacity and is intervening administratively to curb imports so they remain at a reasonable level.

It was also mentioned that the SBP could make an action plan soon to facilitate the opening of LCs noting that the SBP had allowed imports on a deferred payment basis, beyond 365 days, from shipment date. Furthermore, it was mentioned that imports funded by foreign exchange available with the importers and raised through equity or project loan/import loan from abroad had also been allowed.

Though the foreign exchange position is very tough but the economic planners are expecting that soon that funding may arrive.

They count amongst it the post-flood support pledges from global financial institutions and countries to the tune of $10 billion. Saudi Arabia has shown willingness to place another $2 billion with the SBP taking the total of its foreign exchange deposits to $5 billion.

In addition, the Kingdom has also signaled to make medium to long-term investments worth $10 billion in Pakistan mainly in its petroleum sector. The UAE is expected to provide $3 billion financial help, including the rollover of its $2 billion foreign exchange deposits with the SBP.

China is likely to pump in close to $9 billion into Pakistan’s economy through the rollover of sovereign loans offered earlier, refinancing Chinese commercial bank loans to Islamabad and enlargement of the bilateral currency swaps.

The government is also expediting the sale of two LNG plants to Qatar to raise an estimated $1.5 billion.