Are we heading towards a total economic meltdown?

The economic crisis appears to have entered a critical phase in Pakistan as the cash crunch is fast squeezing the supply chains of everyday consumables with the eventual breakdown staring in the face.

The financial policy makers have squandered precious time giving rise to conjecturing that something more than economic considerations are involved in the crisis and that their resolution has become the main bone of contention.

Though it is not clear what such considerations could be but they are crucial enough to sustain the ongoing crisis and many analysts believe that unless a satisfactory settlement emerges the chances of the resolution of the issues are remote.

It is very surprising to observe that despite issuing statements of support by friendly countries and global financial institutions no concrete steps are visible aimed at ameliorating the fast approaching economic meltdown. It appears that the institutions and personnel given the responsibility of managing national economy are virtually paralysed and could not do anything to mount an appropriate rescue effort.

The situation has come to such a pass that the governor of State Bank of Pakistan (SBP) was heckled at the meeting of industrialists that normally try to stay at its right side. Added to the insulting treatment meted out to him the industrialists presented him with a key presented of the closed-down industrial units amidst allegation of corruption within the institution.

The central bank was accused of forcibly impeding imports in the country with the result that over 9,000 containers are stuck up at seaports threatening to break the supply chains of essential goods.

The import-dependent businesses are now teetering towards closure, which would trigger a breakdown of supply chains, as the country’s domestically manufactured goods are also based on imported raw materials. Goods such as wheat, fertiliser, cotton, pulses, onions, tomatoes, tyres, newspaper prints and electric bulbs are all imported to cater to the needs of the country.

The importers are unable to get the containers cleared due to a shortage of dollars with the shipping companies threatening to suspend Pakistan’s operations over the country’s failure to make timely payments.

The mushrooming crisis will soon tip over into an ugly catastrophe striking households, offices and hospitals. The central bank itself is in a quandary with a paltry $4.4 billion in reserves that are barely enough for three weeks of imports and the estimated needs to clear the containers and pending requests for opening more letters of credits stand in the range of $1.5 billion to $2 billion.

In addition to that, the government has stopped over $2 billion in payments of dividends, which will hurt future investment prospects. More than the amount needed to grease the wheels of the economy, it is the impact of shortages due to disruption in supply chains that will cause catastrophe in the shape of more money chasing less number of goods.

The financial situation is dire already with factories halting production that have started laying off workers, potentially precipitating an employment crisis. Hospitals have started running short of medicines while the cars may soon shut off on the roadsides on a rainy day due to malfunctioning of windscreen wipers or depleted fuel. Another substantial factor is galloping inflation and it is noted that the wheat flour crisis has taken a toll on human lives due to a massive surge in prices.

Inflation is raging in the country to the tune of 30% and the fast approaching financial breakdown may seriously disrupt the national supply chain triggering hyperinflation with the price structure becoming almost impossible to contain. By the look of things the disruptive stage is not very far and unfortunately there is hardly any efforts witnessed that are aimed at rectifying the situation.

It is quite clear now that the incumbent coalition dispensation has become inactive in respect of managing the economy and many factors are cited for this inaction. It is pointed out that the dominant party of the coalition government is badly split up between insulating the people from further financial hardship but is equally worried about its fast eroding political capital. It did stop the majority of imports in the country in a forlorn bid to save the fast depleting foreign currency reserves but this was the utmost act that it took and that too was rated as an administrative measure instead of having productive financial angle. Confronted with a serious situation whereby almost 35 per cent of reduction taking place in industrial activity the government appears to be looking the other way and this inertia is further complicating the situation.

Another serious issue raising its head is the expected shortfall in petroleum products and such fears are substantiated by one oil cargo of Pakistan State Oil has been cancelled while the fate of another letter of credit for another cargo is not known. Pakistan’s energy needs are met by import of energy products that is currently estimated to be a monthly arrival of 430,000 MT of petrol, 200,000 MT of diesel and 650,000 MT of crude oil that cost almost $1.3 billion. Pakistan is acutely energy deficient and any disruption caused in its import can cause serious problems for the country.

In a bid to counter inflation the SBP has announced an increase the interest rate by one per cent taking it to 17 per cent. In this context it is also reported that the Exchange Companies Association of Pakistan announced that it would remove the cap on the US dollar forthwith. Currency experts say the rupee has been falling despite being managed by the SBP. Amid shortage of dollars, the gap between its rates in the interbank and open markets has significantly widened, drastically hurting the economy and diverting remittances from the legal banking channel to the grey market. In the meanwhile the central bank also noted that three major economic developments have taken place since November specifying that inflation continued to remain elevated, near-term challenges for the external sector have increased including continuous drawdown in foreign exchange reserves and global economic and financial conditions broadly remaining uncertain that are correspondingly affecting economic factors in Pakistan.

These factors have contributed to the government softening its stance towards IMF bailout conditions and it appears that it may take steps suggested by the international lender so that the impediment stalling the IMF programme is removed. The reports are suggesting that the government has completed its workings on all contentious areas on the basis of its informal interactions at the recent Geneva conference after weeklong deliberations. As far as the IMF, it is not clear when its team will visit Pakistan to complete the ninth review of the programme but the official sources point out that it may be sooner than later.

The current economic situation is making it very obvious that the government is left with hardly any option but to comply with the loan conditions that include a market-based exchange rate, increase in electricity and gas rates, additional taxes to make up for revenue slippages in order to contain the budget deficit within the original programme targets and removal of import curbs. In the interim the government is seriously mulling over introducing energy rationing but the political faction within in that is insistent to ward-off the onus of responsibility of the financial meltdown from the ruling coalition.