Fragile economic position despite dollar control measures

The extreme volatility in the stock exchange is supposedly a barometer of the economic activity taking place in a country and Pakistan’s stock trade is undergoing highly volatile sentiment that is keeping it topsy-turvy.

Though the dollar has lately recovered its value a bit owing to probably strong-arm tactics employed by the establishment that is however believed to be temporary arrangement.

Official authorities took measures against currency speculators that resulted in reduction of the price of dollar driving up the price of the dollar in the open market. These measures have reduced the dollar price along decreasing the difference between open and interbank rates to less than 2% but remains slightly higher than the IMF benchmark of 1.25%. Moreover, the State Bank of Pakistan (SBP) has implemented administrative measures to limit the role of exchange companies in influencing the dollar’s value.

Commercial banks have been encouraged to engage actively in foreign exchange business through wholly-owned exchange companies.

Nevertheless, the rupee was and still is under pressure due to the surging import bill, the international rise of the dollar and the interbank market endlessly chasing the open market rate of dollar to keep the gap below 1.25 per cent to meet a key IMF goal.

In the process what has been observed is that the rupee has lost nearly 26 per cent of its value since the beginning of 2023. The basic difficulty is caused by the turbulence in the foreign exchange market that has prevented the IMF to not impose its condition to narrow the gap between the interbank and open markets and this factor is allowing two exchange rates not only to sustain them but it will also not bring the difference in both the rates.

The fact of the matter is that all prospective investors keep on closely monitoring the balance of payments situation because the next review by the IMF will not happen for a few months and once it does happen then it would be clouded as there is no clarity over the planned investments from the supposedly friendly Gulf nations.

The complications arising of this uncertainty imply reduction of foreign capital inflows that would keep the negative pressure on the value of rupee. It is now widely believed that along with the technical financial reasons there is strong element of inside manipulation of the currency market that has so far proved to be uncontrollable. It is acknowledged that the unruly business circles, in cahoots with the state machinery, are involved in currency manipulation and they are unwilling to stop this nefarious practice despite some representatives of such traders ensuring the establishment full cooperation in its quixotic pronouncements of quickly bringing back the economy on the path to prosperity.

The recent turmoil regarding the inflated electricity bills has further exacerbated the economic uncertainty compelling the caretaker administration running for relief to the IMF.

The international lender was not conducive to agreeing to the relief plan presented by the financial managers of Pakistan and is holding on to its stringent stance taken.

It is not a surprising to learn about the drift of the attitude of the IMF as it has been deeply disappointed by the repetitive deception, corruption and inefficacy of the official Pakistani finance sector and is not prepared to extend the rope anymore.

This is reason that the IMF did not look favourably at Pakistan’s request for relief and, it appears quite reluctantly, has conditionally approved the gradual payment of August’s electricity bills over three months for consumers not eligible for subsidies and using up to 200 monthly units.

Lifeline consumers and those within this consumption bracket who are protected from price increases will not be eligible for this temporary relief.

This decision implied that only around four million consumers, or 10% of the total, will be eligible for this assistance.

The government had initially requested permission to stagger bills for consumers using up to 400 monthly units which would have benefited 32 million consumers or 81% of the total but this request was not accepted by the IMF.

It may be recollected that the electricity price was raised by Rs.7.28 per unit for consumers using up to 100 units bringing the cost to Rs.24.21 per unit. For consumers using 101 to 200 units, the price was increased by Rs.8.28 per unit reaching Rs.30.68 per unit.

These increases in electricity bills prompted public outrage. The stringency of IMF’s stance could be gauged from the fact that the temporary relief for electricity consumers will come at a cost for gas sector consumers.

The IMF also has stipulated that Pakistan must simultaneously announce relief for a specific group of power consumers, initiate a crackdown against theft and low bill recoveries, and notably, increase gas prices.

This hardline attitude probably spurred on the activities of the establishment in respect of increasing recovery of electricity bills that further angered the suffering people and may have triggered the reported comment of the army chief regarding the uncomfortable grip exercised by the IMF over Pakistani financial matters.

The fundamentals of Pakistani economy have gone badly haywire and what is needed is a massive overhaul of the entire economic structure of the country.

This fact is borne out by the Fiscal Risk Statement (FRS) released by the finance division that has emphasised higher sovereign guarantees and poor performance of state-owned entities (SOEs) as potential risks and uncertainties that could impact the country’s fiscal outlook while record inflation rates posed heightened risks to the country’s external stability.

Just the cumulative problems created by loss-making SOEs costs a whopping 9.7 per cent of GDP through outstanding stock of loans and guarantees and resultantly the public and publicly guaranteed debt stock reached 78.4 per cent of GDP, a really dangerous level. In addition, the external debt, which entailed currency risk, constituted about 37 per cent of the total public debt.

The fixed-rate debt portfolio has decreased in recent years and currently stands at only 26 per cent of total public debt, increasing refinancing risks as the average time to maturity of domestic debt was 3.6 years.

The FRS is primarily focused on anticipated macroeconomic shocks, debt and guarantees, climate and natural disasters, SOEs and public-private partnerships (PPPs) given that these represent the most important fiscal risks facing the government and among them, policy implementation and SOE have been highlighted as high risks.

The report refers to the difficulties emanating from global factors such as supply chain issues, inflationary trends and prolonged Russia-Ukraine war and mentions that the increase in interest rate as a measure to control inflation has actually badly weighed on the overall economic activity in the country.

The scourge of volatile inflation has now become the unbearable part of the lives of the people of the country and shows no signs of abating as its underlining factors such as currency devaluation, energy and food prices in the global market along with the greedy profit motives of the trading class that operate with impunity.

The FRS concedes that the national economic activity will remain constrained owing to losses in agricultural production caused by floods and difficulty in meeting external financing needs. Moreover, adjustment in energy prices could well cause further increase in inflation.