Cumbersome economic affairs

ByAsrar Raouf

Former Civil Servent


February 5, 2023

Cumbersome economic affairs

Asrar Raouf talks about the current economic scenario

With the foreign exchange reserves of the country hitting a 9-year low and negotiations with IMF getting protracted, the Cumbersome economic affairs of Pakistan are fast pushing the country towards an economic meltdown. It is quite obvious that the economic managers are getting chaotic by the day with nothing coming to their rescue. It is manifest that without the green light of the IMF no other financial agency would lend money to Pakistan and that appears to be a catch that has gripped the country and it looks that the incumbent financial high ups take it as almost insurmountable obstacle. The foreign exchange reserves have reportedly gone down due to external debt repayments. Such unprecedented developments have deeply impacted the value of Pakistani rupee that is now experiencing a historic low of Rs.271 against dollar. To the detriment of the country’s economy, the Pakistani currency has lost a whopping 24.51 per cent over the fiscal year that started in last July. Experts point out that the extremely worrying depreciation in the foreign exchange reserves is the outcome of decades of malgovernance, incompetence, merit system failure and politically motivated economic decisions.

It is reported that without IMF umbrella, Pakistan’s external financing pipeline is on the verge of drying up as the country was the recipient of 40 per cent lower inflows amounting to only $5.596 billion in the first half of the current fiscal year against $9.4bn in the same period last year. The most worrying aspect of this situation is that for a country heavily dependent upon foreign inflows, it received just 24.5 per cent of $22.8 billion budget target implying that unless IMF comes to rescue as early as possible. If in this case it does not happen at the earliest then the country would be unable to receive higher foreign inflows and consequently Pakistan would be unable to meet not its external debt obligations but its crucial imports would also be drastically curtailed causing a breakdown resembling the situation that took place in Sri Lanka. The current position of foreign inflows could be gauged by the fact that in December last year Pakistan received only $478 million, registering a fall of 43 per cent as compared to $842 million in November 2022 and $4.56 billion in December 2021. These figures bring to fore the alarmingly drastic reduction in the inflows that is extremely unnerving for the financial managers of the country.

It must be borne in mind that Pakistan’s foreign flows come from multiple sources but unlike previous years there it was reported that they came only through three sources restricting the scope of this source. The three major sources in this respect this year are the moneys coming from multilateral lenders amounting to $4.77 billion followed by $708 million from bilateral lenders and only $200 million from commercial banks. The cumulative amount received in this head was short of the budgetary target of $7.5 billion causing a problematic paucity of funds. Equally worrying aspect is the reluctance of private commercial banks that are showing concerns about the delay in finalising of the review of IMF programme. It is worthwhile that international bonds considered the fourth source of acquiring foreign inflows has ultimately dried up owing to poor credit rating amid external account challenges that have caused the historic drop in foreign exchange reserves. It is reported that government was relying upon and had budgeted $2 billion in international bonds for the current fiscal year but this expectation badly foundered and nothing came in through this source.

Badly under duress the incumbent dispensation has started to roll out fiscal and monetary measures as demanded by the IMF. The incumbent finance minister was seen as indecisive after taking office after replacing his party colleague and the impression conveyed by this relative inaction was hectic attempts on his part to delay tough economic measures demanded by the IMF as he and his party leadership was deeply concerned about the steep reduction in their political capital as the tough measures carried out by the incumbent government. The public approval and popularity of the main party in the incumbent government experienced went down drastically and its leadership tried to rectify the situation by asking the IMF to go slow on its demands but the international lender refused to do so. Instead of loosening its stance the IMF actually increased the quantum of its demands and now is asking for providing the financial assets of government functionaries as the lender is convinced that a large portion of the income of the state is pilfered by them seriously harming the monetary position of the country. It is believed that this step of the IMF finally led the political dispensation to blink first though in the process they have led on the international lender to pry into a crucial yet highly guarded domain of the state’s administrative apparatus. Though the decision makers have conceded to the IMF demands but it looks that the probing quest of the IMF would not be given up and may cause some serious jitters disruption in the official circles.

As the first step to fulfill the demands of the IMF the government raised the fuel prices by Rs.35 per litre registering an increase of 16 per cent. Moreover, it increased liq¬u¬efied petroleum gas (LPG) price by 30 per cent and finalised a minimum of Rs.6 per unit average increase in electricity rates between now and August. These measures have come accompanied by a rise of one percentage point in the State Bank’s policy rate and the removal of an exchange rate cap leading to over 14 per cent depreciation of the rupee bringing it closer to Rs.300 for a dollar. By all accounts these measures fall short of IMF’s demands that is insistent on bridging the extra-high fiscal gap ranging between Rs.2 trillion to Rs.2.5 trillion. On revenue collection front the FBR has reportedly collected Rs.3965 billion in seven months between July and January and is required to collect Rs.3,505 billion more in the remaining five months of the current fiscal to meet the target of Rs.7,470 billion.

Although the tax collection shortfall has narrowed to Rs.214 billion in the first seven months of current fiscal year but it is primarily the result of the depreciation of rupee. Accordingly, the revised estimates now point out to the increase of Rs.4 billion in revenue as the government’s decision to cave in to the IMF’s demand to let market determine the exchange rate proved to be a blessing for the struggling FBR. As a result, against the monthly budgetary target of Rs.533 billion, it provisionally collected Rs.537 billion. This may be slightly encouraging for the FBR because just a few weeks before it was afraid that it would suffer another Rs.40 billion tax shortfall by January. Still the tax collection is not looking sound enough even to comply with the laid down target for the current year and bridging this gap is simply daunting. The official financial managers are pointing out that they have no option but to agree to the demands of the IMF implying that they will be compelled to put more financial pressure on the people in order to stay economically afloat. TW

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