Pakistan's economy still under clouds!

The new caretaker administration realises fully-well that it has not inherited a bed of roses but has taken on a very tough challenge both from political and economic angles. It is widely acknowledged that the Pakistan’s economy is still under clouds and it will take a long time for it to recover.

By all accounts this is the most inopportune time to change horses in the complicated game of governance but that is where circumstances have brought Pakistan to. It is not hidden that Pakistani economy is in grip of multiple and intractable issues that required persistent and patient handling.

For the time being the new financial managers appear to be in a quandary and do not have a clue about where to begin from as matters are really complicated. The main issue is managing the temporary financial arrangements with the IMF that have tremendously raised the level of difficulties.

The caretakers are handicapped by their restricted mandate though the powerful elements supporting them within the Pakistani establishment are encouraging them to take difficult decisions with the worry of adverse fall-out as was witnessed when the price of petrol was raised to Rs.17.50, a hike that would have brought din of protests if political elements were running the show.

The problems are confounded by the very fact that the Pakistani rupee is subjected to unrelenting drubbing and the future of temporary reprieve granted to Pakistani foreign exchange reserves by external financing is dwindling.

In this context, Pakistan got over $5 billion in fresh loans in July, which was the highest amount received in any month, to meet project and foreign exchange reserve requirements, as the interim government sought a review of the annual financing plan in light of the prevailing economic conditions.

Pakistan received $2.9 billion in budget and project financing and another $2.2 billion came in coffers of the central bank in July and on the basis of these factors, the gross foreign exchange reserves held by the central bank jumped to more than $8 billion. Out of the total of $5.1 billion, $3 billion was disbursed by Saudi Arabia and the UAE with $2 billion loan for a period of two years at 4% interest rate with the loan maturing in July 2025 along with IMF chipping in with $1.2 billion.

The Asian Development Bank (ADB) disbursed $20 million, the World Bank $82 million, the Islamic Development Bank $67 million and Saudi Arabia $100 million under the oil financing facility. Pakistan received a $75 million loan against the highly expensive Naya Pakistan Certificates.

Despite this temporary reprieve, the spectre of rising inflation is horrendous as depreciation of the exchange rate will result in an increase in the POL prices and the same will apply in case of an increase in the fuel price adjustments (FPA) in the wake of furnace oil and imported RLNG becoming dearer in months ahead. Headline inflation as well as core inflation is expected to further go up so the policy rate would also be increased under the IMF conditions.

The chances of the economy heading towards steep stagflation on account of lowering GDP growth and an upsurge in CPI-based inflation in months ahead. Its ultimate victim would be the poor segments of the society because stagflation would push up poverty and unemployment.

Another difficulty is the upsurge in the rate of dollar against rupee that has crossed Rs.300 mark and has made the situation precarious for clearance of imports, payment of dividends and materialising structural benchmark condition of the IMF under $3 billion Standby Arrangement (SBA) for keeping the difference between interbank and open market not more than 1.25 per cent.

The structural benchmark has now breached, as this difference stands at around 4.5 to 5 per cent and the widening gap between interbank and open market rates will further reduce the possibility of luring remittances. In this situation the State Bank of Pakistan is consistently looking the other way, not even hinting to try to stop currency speculators from operating with impunity.

Same is the case with the caretaker administration whose finance managers are required to determine the Key Performance Indicators (KPIs) and that could be done by assigning their relevant members clear responsibilities that has not taken place as yet. In the prevailing difficult economic situation, the current account deficit witnessed rebounding and stood at $1 billion for July 2023 in the wake of reduced exports, remittances and increased imports. On the internal front, the FBR’s revenue collection has also lagged behind than the required growth to materialise the annual target of Rs.9.4 trillion.

This collection target is quite a large ask and it may prove to be a very difficult target to achieve. It is very clear that the FBR does not have the required wherewithal to successfully fulfil the collection targets assigned to it.

The situation is required to be viewed in the backdrop of the fact that the IMF’s recent staff-level report underlined that medium-term risks to Pakistan’s debt are high and the risks included uneven programme implementation, political risks and access to adequate multilateral and bilateral financing in view of the high gross financing needs.

IMF has pointed out that Pakistan needs $12.3 billion in fresh loans just for the July-December period of current fiscal year to meet the requirements of maturing loans. Overall, for this fiscal year, the IMF has estimated the gross financing needs at $28.3 billion.

On the other hand, the much-hyped Special Investment Facilitation Council (SIFC) has decided to implement a plan for legislation for corporate contracts and cooperative farming on private land, such as provincial legislation to safeguard land rights and dispute resolution, establishing a special unit at the Security and Exchange Commission of Pakistan (SECP), special courts to settle disputes, tax holidays, incentives, and risk mitigation, special authorities at provincial levels and pilot models at all provinces.

The SIFC, jointly run by civilian and military’s top brass, has so far taken the decision that 3-5 investment propositions would be short-listed in the priority sectors for investment with complete analysis, technical and financial viability, information on duty structure both at federal and provincial levels, availability of required infrastructure, procurement method preferably G2G (government to government) or open bidding, and crystal clear classification as short, medium and long-term projects.

SIFC has so far identified and approved 20 projects for attracting multibillion-dollar investments from the Gulf states and others countries out of which nine have been converted to the required template.

The identified projects included Saudi Aramco Refinery, TAPI Gas Pipeline, Thar Coal Rail Connectivity, hydropower projects of 245 MW in Gilgit-Baltistan, handing over of 85,000 acres of land to a single investor, the establishment of cloud infrastructure and telecom infrastructure deployment.

Later, the SIFC was told that project-specific teasers for all projects approved by the apex committee are ready, including technical and feasibility information, excluding the Thar Coal Link.

The SIFC also decided to hire a financial adviser to work out modalities for offering stakes to Saudi Arabia in Reko Diq. It is also under consideration for holding talks between Balochistan and Pakistan Petroleum Limited (PPL) to resolve the lead-zinc mining lease issue in the Khuzdar district. The PPL may consider floating the Barite-Lead-Zinc project to potential investors.