Dr. Tahseen Mahmood Aslam shows the difficulties Pakistan central bank is under
The State Bank under pressure and financial situation of Pakistan has regrettably touched the rock bottom resulting in huge hue and cry throughout the country. All financial institutions mandated to manage the economic affairs of the country have come under heavy criticism including the State Bank of Pakistan (SBP) that as the central monetary institution of the state is under tremendous pressure. The SBP was hedged from protestations earlier as it operated under the supervisory control of the federal financial outfits but after changes in its operating practice under specific instructions of the IMF now it has come under increased public scrutiny. Widely held to be a quasi-independent body, now the SBP is reportedly exercising executive independence and it is quite obvious that its policies and actions will be closely observed with the result that it is exposed to public reaction. During the incumbency of the former SBP governor, acknowledged to be the IMF nominee, it assumed a position whereby it consistently conveyed an impression that it was acting not only independently but actually mostly in contravention of the policies of the federal financial authorities. Since after this development a clear tug of war is clearly seen to be waged between the government and its central bank creating more problems for the national economy.
The reduction in the goodwill of the central bank came to fore during the bitterness witnessed during a recent meeting between the SBP functionaries and traders whereby the traders strongly berated the monetary policies followed by the central bank. The meeting turned into a shouting match with traders hurling barbs at the governor SBP presiding over the proceedings that sometimes bordered on outright insults for imposing import restrictions. The members of KCCI just bubbled over with emotional outbursts with traders accusing the SBP for letting 5,700 containers laden with food, medicine and industrial raw materials waste away at port for months on end. They pointed out that banks have refused to open letters of credit (LCs) for a majority of imports under explicit directives from the SBP as the country fights a serious shortage of dollars. They insisted that by reducing dollar outflows the heavily dependent industry on imports has come to a virtual standstill and has resulted in widespread shutdowns and redundancies.
The traders angrily told the top hierarchy of the central bank that the manufacturing capability of the industrial base of the commercial hub of the country has gone down by something like 35 per cent badly hurting the national economic cycle. In an extremely sarcastic manner the traders handed over a giant key of industrial units in a velvet box to the governor SBP by stating that this represented the visual demonstration of the closure of industrial activity. Obviously the governor squirmed in his seat and refused to accept the box but could not make eye contact with the presenter. The traders made it clear that they doubt the intent of the central bank particularly in wake of the fact that it has disallowed banks to process import documents even though the most long-time overseas suppliers have extended credit for one year implying that there was no burden on the banks for immediate dollar payments.
Most worrying aspect of the meeting was the allegation leveled by one trader who looked the governor in the eye and said he paid a bribe of $2,000 to SBP officials to get clearance for a dollar payment adding that the SBP has become an auction house where importers line the pockets of officials for getting their foreign payments cleared. The governor SBP looked harassed but kept his cool repeating his views that the country would receive fresh inflows of dollars in the coming weeks and the liquidity situation would improve going forward. However, he asked the traders to provide the SBP with granular details about the withheld imports and sector-wise values of pending payments. He reiterated the SBP’s official position that LCs of food products, energy-related imports and industrial raw materials will have a higher priority than all other categories. He mentioned that there is a total backlog of around 11,000 cases of import payments — down from 33,000 pending cases in 2022 — that the SBP is trying to resolve at the earliest. The traders however pointed out that foodstuff worth $160,000 have been stuck on port since 27 December, 2022 and with every passing day brings an increase in daily demurrage and in many cases it is now higher than the cost of imported items.
The financial situation in the country is now in dire straits as the energy sector has raised red flags over looming supply disruption. More than three dozen refineries and market companies along with the leading refineries and marketing companies, including Pakistan State Oil (PSO), had complained about the shortage of exchange reserves and refusal of private banks to open LCs for oil imports. In order to fulfill the country’s needs, the energy sector imports petroleum products and requires the banks to facilitate requisite foreign exchange and imports. The state-run PSO complained that due to dwindling reserves and the issue of dollar availability with commercial banks, the SBP had issued instructions to banks to restrict the establishment of LCs for essential items only. PSO believed the list of essential items also included POL products but since the beginning of January, the national fuel supplier was unable to open certain LCs for the import of petrol and lubricants due to limited dollar availability.
It was reported that the non-availability of LCs is resulting in negative signals to the international oil suppliers lead to forced cancellation of oil cargoes. The demands are increasing of allowing banks such as Habib Bank, Habib Metropolitan and Askari to open requisite import contracts/confirmed letters of credit to ensure smooth supplies. Following on the heels of oil sector the telecommunication industry has expressed apprehensions over banks’ refusal to open LCs for the telecom companies and said that the restrictions were causing delays in the execution of new projects. All telecom segments had similar concerns as telecoms, including Jazz, Zong4G, Telenor, and Ufone, as well as the backend technology equipment suppliers, are dependent on imported items for maintenance and expansion of their networks.
SBP is taking further pressure on account of high levels of inflation and taking this in view it decided to increase the interest rate by one per cent to 17 per cent. This increase has taken place on the premise that inflationary pressures are persisting and continue to be broad-based and they cannot be left unchecked, hence increase in interest rate. Furthermore, in an attempt to ease the ongoing import crisis, SBP has issued a general guidance to the banks to prioritise the import of certain categories such as food, pharmaceuticals, and energy. The central bank’s decision comes days after businessmen strongly criticised the restrictions imposed by the State Bank of Pakistan. Accordingly, till 31 March, 2023, banks have been advised to process and release documents of shipments/goods that have already arrived at a port in Pakistan or have been shipped on or before 18 January, 2023. However, the SBP directed banks to advise their customers to inform them prior to conducting an import transaction to avoid complications in the future. TW