Multiplicity of economic issues

ByAsrar Raouf

Former Civil Servent


November 26, 2022

Multiplicity of economic issues

Asrar Raouf comments on various economic aspects

The Multiplicity of economic issues & political turmoil in the country continues and has overshadowed much of the efforts aimed at improving the economy that is also badly suffering from the after effects of devastating floods. Though foreign inflows in shape of renewed tranches of loans are arriving after decent intervals but the impending danger of financial default still hovers over the horizon. The financial stagnation has worsened the pressures of inflation and the price increases are virtually unstoppable. The coalition government appears to be in a flux and its financial managers do not know which problem they address first as the entire economy is beset with problems. On top of all this is the sustained pressure of the IMF that is not very willing to concede much ground to Pakistani financial authorities for creating more fiscal space. Though the IMF has shown due concern about the widespread losses suffered by Pakistan on account of floods but it is unwilling to give a carte blanche to the financial managers about financial matters.

In this context it was reported that though the IMF and Pakistan have apparently bridged the gap on showing flood-related expenditure in the country’s budget for the present financial year yet such an understanding is purely tentative and may come under scrutiny when the ninth performance review of IMF’s $7 billion bailout package is discussed that has been delayed for the time being. This postponement in review date entails that Pakistan will not obtain the disbursement of the next tranche of $1.2 billion till January next year that have caused serious worry amongst the policy makers as it exposes the country to default risk, measured by the five-year credit default swap, jumping from 56.5 per cent to above 75 per cent for the reason that Pakistan may default on its upcoming payment of $1 billion against the maturity of Sukuk on 5 December 2022. Though such fears may be exaggerated but the markets remain on edge due to declining foreign exchange reserves that dropped to below $8 billion.

The main worry here is the lack of confidence shown by the IMF in the intention and the ability of Pakistan to take tough decisions and putting its house in order. It is widely known that Pakistan is badly enmeshed in the vice-like grip of mafias and cartels that dictate its financial and economic policies and these elements hardly allow any improvement in the status quo to take place. Time and again the efforts of IMF have failed to pin down successive Pakistani financial authorities to carry out appropriate structural reforms in the fiscal and monetary system of the country but every time the country has wriggled out started pursuing policies dictated by the elements holding disproportionate power. Moreover, the current situation has been exacerbated by the fact that friendly countries have also refrained from bailing out Pakistan at this critical juncture unless something substantial is shown in terms of a reforms process.

In order to allay the fears of an impending default the Pakistani finance minister, who has recently disappeared from the scene, has reassured that this is not the case and that the country is not even close to default. He emphasised that the Sukuk bond payment is a very small transaction and technically it should have no large impact on the overall finances of the country. The other official financial managers also toed the same line asserting that with the IMF programme in progress there was no immediate threat of Pakistan going to default. Instead, they claim that the country’s exports have improved, foreign remittances were coming and foreign direct investment was getting better.

On the contrary, it was reported that the State Bank of Pakistan has mentioned that Foreign Direct Investment (FDI) in Pakistan has radically declined by 52 per cent during the first four months of the current financial year despite assertions of the official personages reflecting the poor economic health and political instability in the country. The FDI fell to $348.3 million in July-October FY23 from $726.5 million during the same period of the last fiscal year. The FDI has been declining each year while the volume of investment is also very thin compared to that of regional countries like India, Bangladesh and China. While the main investment is limited to a few sectors, the FDI inflows are limited to a few countries.

In this context it is reported that the highest FDI of $74.8 million came from China during the first four months of the current fiscal year against $99.5 million during the same period last year. China has been the biggest investor for the past several years but its investment has started declining as reflected in the comparative figures for two years. The FDI inflows from the United Arab Emirates increased to $67.6 million in the first four months of the current fiscal year from $51.4 million during the same period last year. This was the only significant increase in the FDI. A drastic decline in FDI was noted from the Netherlands as it fell to $37.7 million from $188 million last year. The FDI inflows from Switzerland also declined to $46.6 million from $50.9 million.

The inflow for electricity and gas was the highest in terms of dollars as it rose to $149 million in the first four months of the current fiscal year from $114 million during the same period last year, followed by the finance and insurance sector at around $102.7 million but it was significantly lower than $157.2 million recorded last year. A massive decline in the inflow was noted in agriculture, forestry and fisheries as it fell to $8.7 million from $154 million. Mining and quarrying, manufacturing and information plus telecommunications received $15 million, $10.6 million and $20.7 million, respectively, in the first four months of the current fiscal year against $59.4 million, $50 million and $79.4 million during the same period last year.

Interestingly though the rupee is fighting its lonely battle against dollar and after a week’s decline picked up speed and finally its price appreciated. One reason for the weakness in rupee was the delay in receiving expected inflows from friendly countries. Moreover, the market also remained depressed due to sluggish inflow of remittances considered the backbone of the economy. In addition the influence exercise by the State Bank and Ministry of Finance on exchange rate has also kept the rupee under duress. The worst impact of this low interbank dollar rate has emerged in the form of a grey market while the exchange companies are short of dollars. Kerb market dealers said there was a dearth of sellers only people going abroad were buying dollars.

It was also observed that bankers themselves were not convinced with the rates being offered in the interbank market and thought it might be a reason that has caused the diversion of remittances towards illegal channels. Since the grey market is a risk for the remitters, most of the inflows are still coming from banking channels. The SBP and the government are monitoring the development of the grey market mainly because the country has recently been removed by the Paris-based Financial Action Task Force from its grey list. TW

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