Asrar Raouf mentions the
hurdles faced by Pakistani economy
Although Pakistan managed to galvanize the international Financial situation still untenable opinion and obtained financial assistance to a level not anticipated by both public and private sectors of the country yet the clouds of uncertainty are still hovering over the national horizon. The international donors pledged a huge sum exceeding $10 billion to help recover from the devastating floods suffered by Pakistan last year but the caveat thereof is that, as confirmed by the incumbent finance minister, almost 90 per cent of the pledges, or $8.7 billion, made in the donors conference in Geneva are project loans and that they will be rolled over the next three years. It was reported that through both bilateral and multilateral donations a sum of $9.7 billion is pledged with and the Islamic Development Bank held a major share of $4.2 billion of the total financial commitments. The breakdown of the amount pledged is that Saudi Arabia committed $1 billion followed by China $100 million, Qatar $25 million, Canada $18.6 million, Denmark $3.8 million, European Union €87 million, France €380 million, Germany €84 million, Italy €23 million and Azerbaijan $2million.
Anyway, despite all drawbacks the donor’s conference proved that the apprehensions about an aid fatigue setting over the world with regard to Pakistan are misplaced. Moreover, it has also proved one crucial point that it actually was the lack of rigorous pursuance of the matter that held back opening of aid coffers. It must be conceded that the governance process Pakistan was subjected to in the near past left plenty to be desired and keeping that in view it is imperative that the government should design and create feasibilities as early as possible for ensuring actual inflows. It is observed up to now that the coalition government is single-mindedly pursuing the aim of obtaining as much financial assistance as possible. There are certainly many issues facing the financial health of the country but a concentrated effort to come to grips with them is what is required at the moment without which it would not be possible to overcome the economic travails.
The current financial situation is indeed dire as the SBP reserves are already down to less than four weeks of imports after recent loan payments to two UAE-based banks the country needs an immediate cash injection. By the looks of it such assistance is unlikely to materialise unless Pakistan swiftly mends its tense relationship with the IMF. In this context it is reported that IMF is insisting upon the government to meet the revenue targets previously determined for the ongoing fiscal year after the revenue collection by the FBR faced a shortfall in December of last year. This gap in revenue collection was a result of a high court invalidating the super tax imposed by the government in June last year and this restriction may only be compensated by staggering the collection of revenue shortfall. It was however emphasised by the Pakistani circles that they are not changing the fiscal budget target and will achieve it.
The main issue appears to be the insistence of IMF that the government should take fiscal measures and cut back some subsidies. Though the incumbent financial team has pointed out that it has identified some fiscal measures but it is insisting that it will not further burden the people. They mention that any measures taken by them will be categorical and targeted implying that the financial team is not prepared to lose further political capital as the coalition government has already taken quite a hit. This insistence is playing a negative role as Pakistan and the IMF did not announce a breakthrough in their talks as was evident from the fact that no date was announced for the mission’s crucial visit to Islamabad despite both the sides terming their first face-to-face meeting in four months positive. It was reported that the purpose of the meeting was to reach a consensus on the measures that would ensure the negotiations for the 9th programme review but nothing came out of them.
The situation is tricky as the FBR has sustained Rs.218 billion shortfalls in taxes during December and in the wake of such reversal the PMLN-led government accorded priority to traders considered as its traditional vote bank and went ahead by giving away Rs.40 billion tax concessions to them. This step was taken in face of a friendly encouragement given to Pakistan by the UK development secretary to continue its macroeconomic reforms and conclude the 9th review of the IMF programme adding that it would be much easier for the world to help Pakistan if Pakistani taxpayers are seen to be playing a core part in this effort. But the incumbent Pakistani political leadership is reportedly trying to persuade the IMF to give Islamabad some breathing space as it tackling the nightmarish situation.
On the other hand pressure is mounting on the finance minister to stop managing the exchange rate as it is proving more harmful than beneficial. Moreover, the efforts to manage rupee-dollar parity run parallel to the conditions set by IMF for releasing the outstanding financial tranche. In this context it is pointed out that artificially managing the exchange rate has given rise to three types of exchange rates of dollar in the country: interbank, open market and grey and this multiplicity has become one of the main causes for furthering economic instability. At the moment, getting dollars on interbank rates is extremely difficult since the State Bank of Pakistan (SBP) has a strong grip over the opening of letters of credit (LCs). The US dollars are available in the open market but not at the rate they announce daily.
However there is a flip side to this equation that is constraining the finance minister not to change his decision to manage the exchange rate and a single rate exchange mechanism will cost heavily to the coalition government as well as the economy as the inflation will immediately surge as the dollar could immediately rise to Rs.240-Rs245. Such inflation will inflate the prices from top to bottom though it may provide a better chance to survive against the default. Skeptics question the blind acceptance of rupee depreciation without realising how much import demand it quashed and the high levels of impact on Pakistan’s balance of payments along with triggering inflation every time the value of rupee goes down.
The skeptics point out that while in theory, currency depreciation should boost exports, but decades of low investment in Pakistan, capacity constraints, poor infrastructure and a myriad of other issues have not allowed a sustainable rise in exports. To the skeptics essentially the equation does not change except for the fact that inflation shoots up harming the welfare of the people. They also mention that the market consensus is the rupee will continue to weaken, and that too, is a faster pace owing to the untenable economic situation and its value may temporarily improve even after a financial injection is received. They point out that it is essential to keep a strong check on the hoarding and smuggling of dollars as both these activities is grossly harming the value of Pakistani currency. TW