“THERE is no other option. We have to finance our $25 billion trade deficit by depleting our reserves.” caretaker Finance Minister and former State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar bluntly remarked on June 12, a day after the latest 3.8 per cent rupee depreciation.

Regarding the increase in fuel oil prices, enforced from June 12, she reminded that these were raised under a certain formula thereby implying that the recent rise in global oil prices was the main reason for the hike.

The fact is the rupee is undernourished. Recent exports have shown an insignificant growth in terms of volume, remittances are growing at around a low three per cent; imports continue to balloon.

Moreover the volume of external debt servicing has grown and, thanks to an accumulation of foreign debt in the past years, outward repatriation of funds by foreign companies operating in Pakistan is also growing.

While foreign direct investment inflows grow, its volume is not large enough to be a significant support to the balance of payments. Current account deficit continues to widen. Our forex reserves are insufficient to keep the rupee healthy.

“All discussions on timing, overvaluation and piecemeal depreciations become irrelevant when you have to manage forex inflows and outflows on a day-to-day basis,” says a senior executive of Habib Bank commenting on the recent depreciation in the rupee value.

Only one option remains, and our caretaker finance minister is likely to tap into it

“Merchandise trade deficit in eleven months of the fiscal year, per the Pakistan Bureau of Statistics, is about $33.9bn (with imports at around $55.2bn and exports at $21.3bn). Current account deficit in ten months of the year is $14bn. SBP forex reserves are at $10bn (as of June 1). No central bank can continue to defend the rupee in a rate-band for an extended period of time (under this situation).”

One June 11, the SBP had no option but to withdraw support and let the rupee find its market value which it did by losing around 3.8pc on that day vis-à-vis the US dollar. This brought total decline in rupee value during this fiscal year to over 13pc.

After the latest rupee slide, policy options for the government to tackle the precarious external account situation are limited.

Technically, the caretakers cannot go to the International Monetary Fund (IMF) for a bailout package, while boosting net inflows of foreign exchange in volumes adequate enough to reduce the current account deficit substantially is next to impossible.

And, knocking at the doors of friendly countries for extending a helping hand once again is also impractical and humiliating. Pakistan has already consumed a large part of $1.5bn Chinese funding arranged recently for external debt payments.

But one option remains. And our caretaker finance minister is likely to tap into it. We can request rescheduling of some loans obtained from foreign countries as well as foreign commercial banks. Dr Shamshad Akhtar even hinted at this possibility at her June 12 press conference, according to reports in local media.

Besides, debt servicing of a part of CPEC-funding could be extended. This debt servicing is scheduled to start from the first quarter of the next fiscal year, beginning July, but an extension of a year or even one or two quarters will provide us with some breathing space.

Now, the million dollar question is how the latest rupee depreciation, the third one in the past seven months, will impact the price line, particularly after the increase in oil prices by the caretaker government just a day later?

Prices will obviously move up. Inflation will certainly soar for all and sundry. But since the basket of goods and services used in calculating inflation is not very representative in its nature, maybe the increase in inflation will look nominal. And, it is but natural that the twin inflation-inducing events (rupee’s decline and increase in local oil prices) will contain growth in demand.

That, in turn, will dampen economic growth prospects at least in the short term. “When the SBP had hiked interest rates in May, many in financial markets had taken it as a clue that the central bank would once again go for rupee depreciation. And the worsening condition of the external account had reinforced this view,” says a senior executive of the state-run National Bank of Pakistan.

Tightening of interest rates becomes an obvious choice in traditional monetary management after or ahead of currency devaluation to contain demand by making bank credit costlier. So, here again, some deceleration in private sector credit is well anticipated and by extension, some loss in economic growth momentum.

Banks’ lending to the private sector remained strong during the current fiscal year, as in the last year, but it seems banks will not be able to meet the Rs1 trillion target announced in the FY18 budget speech by then finance minister Ishaq Dar.

In eleven months of this fiscal (between July 1, 2017 to June 1, 2018), banks lent Rs578bn to the private sector, up from Rs528bn in the year-ago period. “But even then hitting the Rs1tr mark seems out of question,” says a senior executive of one of the top five banks.

“Under these circumstances, banks may once again find it attractive to lend as much money to the government as possible to maintain their interest income streams,” says the treasurer of a large local bank.

“And, with the private sector having been hit by a high interest rate and a weaker rupee — which will increase the cost of imported inputs before showing a real depressing effect on imports of finished consumer goods — the future elected government will have an excuse to increase bank borrowing in the name of boosting the economy through public sector development activities.”

Published in Dawn, The Business and Finance Weekly, June 19th, 2018

Opinion

Editorial

Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...
New terror wave
Updated 27 Mar, 2024

New terror wave

The time has come for decisive government action against militancy.
Development costs
27 Mar, 2024

Development costs

A HEFTY escalation of 30pc in the cost of ongoing federal development schemes is one of the many decisions where the...
Aitchison controversy
Updated 27 Mar, 2024

Aitchison controversy

It is hoped that higher authorities realise that politics and nepotism have no place in schools.