Opinion: Financial crunch deepens

The ongoing financial crisis in Pakistan is almost unprecedented in its nature and content and is exacerbating by the day. At the centre of crisis is the financial crunch owing to the extreme paucity of foreign exchange that has witnessed the entire economic cycle coming to a grinding halt.

Resultantly, the overall business confidence in Pakistan fell to minus four percent that most observers consider as not surprising keeping in view the highly challenging political and economic situation.

Since after the induction of the coalition government in April 2022 the country is in the grip of intense political turmoil and has been devoid of political stability and has suffered heavily owing to the never-ending political agitation.

The current financial scenario apparently looks untenable and may rattle the overall economic position of the country that is widely forecast to be on the edge of financial default.

Though the official circles are vehemently denying the possibility of a default, yet the conditions are ripe for bringing in such an eventuality.

The reputation of the financial czar of the coalition government has been badly besmirched in the process and it is now widely believed that he lacks the wherewithal to counter the mounting difficulties.

One of the most disastrous consequences of political uncertainty is that it has ushered in economic instability with macroeconomic indicators of the economy’s health continuing to deteriorate.

The economy remains engulfed with crises of all sorts: imported onions, ginger, garlic and soybean remain stuck at the Karachi port because foreign exchange-starved banks are not retiring their import letters of credit.

It is reported that Pakistan Railways is not able to finance imports of Chinese coaches also due to short foreign exchange and even the Ministry of Defence has been advised to check foreign exchange availability before importing defence equipment.

This is a nerve-wracking situation and is cyclically affecting all segments of the national economy with policy makers finding themselves in an unenviable fix and feeling encircled in an almost impossible hopeless situation unless something radical is attempted and subsequently achieved.

This situation has arisen due to the fast-depleting foreign exchange reserves of the country. It is pointed out at the end of March 2022, the SBP’s reserves stood at $11.425 billion but they gradually tanked to an almost four-year low of $6.715 billion in December.

A massive decline of $4.71 billion or more than 41 percent in a little over eight months — mainly due to external debt payments — has compelled the SBP to restrict all foreign exchange outflows that could be delayed.

The fall in foreign exchange reserves to below $7 billion level has happened for the first time since January 2019. The current reserves stand at around $6.7 billion, which is almost equal to $6.6 billion on January 18, 2019. The $6.7 billion reserves are not enough to service the $8.8 billion principal and interest payments during the January-March period of the current fiscal year.

To make situation further complicated is the fact that external financing gaps are getting wider as non-debt-creating foreign exchange inflows remain low and between July and November exports were down by 3.5 per cent year-on-year basis to $11.932 billion.

Although imports shrank 20 per cent year-on-year during this period, still the import bill totaled $26.338 billion pushing the trade deficit to $14.406 billion that is rated to be large. It is mentioned that home remittances alone cannot adequately compensate as they cannot be expected to exceed $12.4 billion. During July-October 2022, remittances totaled $9.9 billion registering 8.6 per cent year-on-year decline.

It is therefore not surprising that the financial managers of the coalition government as well as the State Bank of Pakistan are in a state of fix and are running from pillar to post to remedy the situation.

To begin with, they have requested Saudi Arabia for providing cash support of $3 billion at their earliest to be deposited with the SBP to help the country meet external financing requirements in the next quarter. In this context the finance minister requested the kingdom for doing this favour and it was also reported that the new army chief on his expected visit to Saudi Arabia may also try to add his weight to the proposition.

Finance Minister made the request during a meeting with the Saudi ambassador and his meeting took place in a string of meetings for two consecutive days when he asked foreign diplomats to seek their financial support and also influence the IMF to soften its stance on releasing its $1.2 billion tranche to the country.

The financial managers are also hectically working to arrange an additional $1.2 billion from Saudi Arabia as oil import facility to tide over the tremendous expense required for importing fuel in Pakistan.

It must be kept in view that Saudi Arabia has recently rolled over a $3 billion deposit previously placed with the SBP and Pakistani authorities are quite hopeful that Saudi Arabia would come to their assistance although the kingdom is unusually slack in responding to Pakistani request implying that it may not be favourably disposed towards this request.

Feeling their backs to the wall, Pakistan has sought even larger debt rollovers from China and the finance managers expect that Beijing will not do their bidding. In the first week of November Pakistan received assurances of a $13 billion financial package from China and Saudi Arabia, including $5.7 billion in fresh loans including $4.2 billion from Saudi Arabia and $8.8 billion from China.

However, no progress could be made during the past one month and instead the country paid back two commercial loans of China totaling $1.2 billion.

It is pointed out that the $13 billion package is equal to 38% of the estimated gross external financing requirements of the country for the fiscal year 2022-23.

If it materializes then it can remove the threat of default in wake of the fact that the IMF has not come up with a major financial package despite imposing numerous harsh conditions. Pakistan is again looking towards the friendly countries as it has been unable to revive the $6.5 billion IMF bailout package that has been derailed for the fourth time in three years.

The IMF has not yet finalised the dates for the staff-level talks that are much needed to acquire the next loan tranche of $1.2 billion. Pakistan and the IMF teams held discussions about the practicality of the official estimates of $32 billion foreign inflows during the current fiscal year.

The discussions mainly focused on the $26 billion inflows estimates by the Pakistani side and the estimates included budgetary loans of $23 billion and grants of $1.5 billion. Pakistan has estimated that it would receive $6.2 billion in foreign commercial loans, down from the previous estimate of $7.5 billion but this money was not received during the first quarter. Of the estimated foreign commercial loans of $6.2 billion, $3.5 billion will come from China.

The remaining $2.7billion will be provided by the non-Chinese foreign commercial banks having shorter maturity periods. In the meanwhile, the exact time lag between now and the release of the next IMF tranche would determine how long negative perceptions about Pakistan’s economy may persist, how long, even necessary imports may remain hampered and how much more value the rupee will shed.