Asrar Raouf casts a glance at the current economic
Though the State of economic limbo figures churned out both by the official and non-official sources indicate that the down sliding of the economy continues unabated but the coalition government is insistent that there is no cause for alarm and that required steps are in hand that will soon turn around the economy for the better. Despite the official assurances, skeptics consistently point out that they cannot see any plan aimed at arresting the economic decline and express deep reservations about the way the national economy is managed. In this context, it is mentioned that the so-called economic wizardry of the incumbent financial minister has been proved to be hollow and that he has miserably failed to stem the tide of adversity that has hit the economy of the country. The finance minister has given the impression of being quite erratic in handling the current economic complexities and he also appears to be conducting parleys with international donors with considerable irritation that may prove very harmful for future relationship with them. Another worry expressed about the finance minister is that he is burdened by many responsibilities apart from his task of managing national finances that are causing serious lack of attention required for country’s economic affairs.
The economic decline is spearheaded by the consistent depletion in foreign exchange reserves that now stand at less than $6 billion and it is rated as the lowest level of reserves since April 2014. During the last year the foreign exchange reserves have declined by $11.6 billion as in December 2021 they were $17.7 billion. The current level of foreign exchange reserves is barely enough to cover a month’s imports. Net foreign reserves held by commercial banks now stand at $5.9 billion implying that the country’s total liquid foreign reserves are now $12 billion. It may however be kept in view that a sizeable chunk of these reserves are lent by friendly countries and may not be utilised for underwriting import bills and this restraint has badly unnerved the commerce and trade circles of the country further depressing economic sentiment. It is widely reported that despite official assurances the friendly countries are not lending any more finances as their reservations are about the lack of successive Pakistani economic managers to remove the structural faults found in the Pakistani economy and they are unwilling to put more money in Pakistani coffers as they think that such an exercise is a favour going to waste.
The immediate worry is the excoriating delay in the release of the latest tranche of money to Pakistan by the IMF and the reason for this reluctance is perceived by the economists is that the coalition government has fallen behind on pre-requisite performance criteria laid out by the IMF. The programme’s ninth review is currently pending with remote talks being held between IMF officials and financial managers of the coalition government for the release of $1.18 billion. The rather lengthy delay in finalising the requisite review has given rise to the claims emanating from various economic observers particularly the former Pakistani finance minister that the country still faces the risk of default. This impression is holding ground despite multiple denials by the officialdom though such denials have lost their credibility. Many observers are also worried as the incumbent government has not provided a credible explanation for the delay in finalising negotiations with the IMF. It is also pointed out that the high-ups of the country’s economic hierarchy is preferring to remain quite about the fast depleting foreign exchange reserves and has not apparently devised a cogent plan to sort out the crucial matters related to imports.
It is observed that with reserves declining to critically low levels, there are fears that Pakistan may not be able to meet its external obligations for fiscal year 2023. In the wake of such fears it is quite intriguing to witness the governor of State Bank of Pakistan expressing confidence in the ability of Pakistan to pay back the entire $23 billion due this fiscal year but the crucial missing point is that through which means such debt will be retired. The extremely untenable financial condition of the country has made the ratings agency S&P Global cut Pakistan’s long-term sovereign credit rating by one notch to “CCC+” from “B” to reflect a continued weakening of the country’s external, fiscal and economic metrics. The agency said that the country’s already low foreign exchange reserves would remain under pressure through 2023 unless oil prices slump or foreign assistance improves. The agency also mentioned that Pakistan also faces elevated political risks that may affect its policy trajectory over the next year. S&P Global added that this year’s severe floods, surging food and energy inflation, as well as rising global interest rates, were also expected to depress Pakistan’s economic and fiscal outcomes with refinancing challenges over the medium term.
One point that is coming to the fore is large-scale outflow of dollars from Pakistan to Afghanistan ever since the US froze the war-ravaged country’s reserves following the Taliban takeover last year. It is also noted that before the American withdrawal from Afghanistan, the country had a dollar glut as the Americans poured it in the country for two decades with the result that the dollar was liberally exported out of the country to Pakistan. The reversal in the process has put tremendous pressure on Pakistani economy as this illegal outflow of the dollar to Afghanistan, along with other much-discussed factors such as the trade and current account deficits and diminishing multilateral and bilateral inflows, has eroded Pakistan’s foreign currency reserves. In this context it is mentioned that in addition to US sanctions on the Taliban regime, Kabul’s directions to its citizens to convert their large Pakistani rupee holdings into dollars or other foreign currencies had ramped up the dollar’s flow towards Afghanistan in recent months. It is reported that Afghans were no longer allowed to keep more than half a million worth of Pakistani currency and any person found in violation of this order would be tried under the anti-money laundering laws.
The Pakistani fiscal system has simply failed to contain the outflow of dollars abroad despite limiting the annual personal foreign exchange allowance to $6,000 for travelers. Most worryingly, no administrative measure adopted over the last one year to stop dollar smuggling across the country’s western frontier has produced the desired results, barring the occasional arrest for attempting to take out the hard currency in large amounts. The illegitimate dollar outflow is one of the many factors that have brought Pakistan’s exchange rate under immense pressure in recent months and contributed to market dislocation, resulting in different exchange rates in the interbank and open markets. It is extremely crucial to plug the illegitimate dollar flows from the country to Afghanistan and it should be ensured that the controls at Pak-Afghan land borders are made more stringent along with taking similar steps for Pakistani ports. In the absence of such stringent measures it would be extremely difficult to reverse the situation and bring stability to the battered economy as continuous bleeding of the foreign exchange may further exacerbate the economic downslide. TW