Persistent Economic Impediments

It is typical of Pakistan that despite loud cries of the country defaulting, the actual default failed to materialise. No one can justify either the widespread apprehensions of financial default or the reasons for Pakistani economy not buckling in.

However, it is not clear what factors are responsible for letting the Pakistani economy to keep on ticking though the financial situation of the country remains as grim as it was when the noises announcing default started to emerge and then kept on rising to no avail. Though the shouts of default are now muted yet the impediments faced by the economy are still there constantly harming it resulting in causing havoc to the people of Pakistan.

It is quite clear that Pakistan’s economic managers cannot get away with taking short-cuts as the financial downturn is very serious this time and requires serious soul-searching.

It is yet to be seen how the incumbent economic managers tackle the most serious issues confronting the economy and what measures they will take to rectify the perilous situation.

The current situation is that the foreign exchange reserves of the country dropped for the first time in six weeks shrinking by some $354 million during the week.

The State Bank of Pakistan (SBP) said the reserves fell because of external debt repayment and stood at $4.24 billion meaning that they were almost near where they were at the beginning of the month. Reserves held by commercial banks rose by $31 million to $5.57 billion during the week. However, with the latest fall in SBP’s holdings, the country’s total liquid reserves are back at the sub-$10 billion level though only last week the reserves had increased to $4.6 billion owing to a $500 million Chinese inflow.

The coalition government is struggling to improve its reserves position which is the main obstacle in convincing the IMF to resume a loan programme. Though Pakistan has avoided default it has been unable to make payments for imports.

It was earlier reported that China is working on a request from cash-strapped Pakistan to roll over a $2 billion loan that matured last week, amid a stalemate in bailout talks with the IMF. However, the incumbent finance minister stated that China had rolled over a $2 billion loan providing relief during acute balance of payment crisis. It was reported that a formal confirmation of the refinancing would be made after the process was completed. Islamabad has been negotiating with the IMF since early February for the release of $1.1 billion from a $6.5 billion bailout package agreed in 2019.

One of the IMF’s conditions for the release of the tranche is assurance of external financing to fund Pakistan’s balance of payments. Longtime ally Beijing is the only help Islamabad has got so far with refinancing of $1.8 billion credited last month to Pakistan’s central bank.

The government has so far been unable to persuade its friends in the Middle East for dollars, while the Fund has also stuck to its guns insisting that it wouldn’t release a $1.1 billion tranche unless Pakistan arranged the $6 billion required to service debt in the current fiscal year. A Chinese debt rollover is critical for Pakistan at this stage though Pakistan will not receive any inflow but there would be no outflow to China as a result, the SBP’s reserves will remain the same.

The poor health of Pakistan’s foreign exchange reserves has grossly devalued the rupee, slashed the imports to the extent that it now hurts economic growth and has kept the country out of international financial markets.

In this bleak scenario it was reported that Pakistan has received an indication from Saudi Arabia for additional loans that may help to break gridlock with the IMF. Pakistan had told the IMF that it would get $2 billion in additional loans from Saudi Arabia and $1 billion from the UAE to meet the additional financing requirements.

It is understood that the wrongly timed and half-baked cross-fuel subsidy proposed by the petroleum ministry has given an excuse to the IMF to delay the staff-level agreement with Pakistan. The IMF has rejected the initial cross-fuel subsidy plan arguing that more details are required to verify its sustainability.

It is now reported that the Ministry of Finance has distanced itself from the plan proposed at a time when Pakistan and the IMF are inching towards signing the staff level agreement. It has advised the petroleum ministry to withdraw the proposal at this stage and iron out the policy details before taking the IMF into confidence in the next review.

This proposal has surprised many who pointed out that announcing the subsidy that would be implemented after six weeks has further muddied the waters. It is also reported that the IMF is hardening its attitude towards Pakistan owing precisely to such thoughtless policy proposals.

The coalition government is feeling tremendous pressure to streamline its financial activities and the result is that it has planned that instead of going ahead with the privatisation of three airports it has approved the appointment of the International Finance Corporation (IFC) of the World Bank as transaction adviser for outsourcing the airports.

The Karachi, Lahore and Islamabad airports will be outsourced under the Public-Private Partnership Act. In this context, the government considered a request from Pakistan Civil Aviation Authority (PCAA), Public-Private Partnership Authority Board allowed them to directly engage IFC as the transaction adviser for outsourcing the operations of these airports.

It is reported that the outsourcing of three airports had been initiated within the scope of the Public-Private Partnership Act-2017 to engage private investors/airport operators through a competitive and transparent process to run the airports, develop land assets and enhance avenues for commercial activities and garner full revenue potential.

Another effort to streamline the financial affairs of the country it is required to undertake proper accountability of commercial banks that reportedly were involved in foreign currency manipulation case. In this context it is reported that the report rendered by the SBP is lying dormant within the governmental finance circles despite clear incidences of charging higher spreads.

The action against at least eight commercial banks has been put on hold despite repeated assurances by the incumbent finance minister to impose heavy taxes on the commercial banks for reportedly making exorbitant profits taking Rs.25 billion to Rs.50 billion by playing with the value of the rupee against the US dollar.

SBP tendered its report pertaining to a limited scope inspection of the matter and furnished its report on 27 December 2022 and the date of submission of the report underscores that the federal government and central bank were deliberately delaying action against the banks.

The SBP report clearly mentioned that the overall increase in foreign exchange income of the banks was mainly driven by higher spreads due to heightened volatility, however, in some cases, the banks charged higher spreads. It added that there was a shortage of dollars and importers were chasing the limited availability but banks went beyond logical spread.

SBP was in the process of imposing monetary penalties on the banks. However, the enforcement action was put on hold because of our understanding that the federal government was considering using a fiscal option with regard to high foreign exchange earnings of the banks. Interestingly, the federal government had an opportunity last month to slap additional taxes through a mini-budget that it has been claiming to impose, in lieu of fines but it let the opportunity go by.