THERE is no reason to panic following the sharp bout of volatility that swept financial markets on Friday, but there are strong grounds for concern.

The rupee saw the largest single-day plunge it has experienced in almost a decade, and even though by the close of trade it had regained some of the ground lost, the simple fact that such volatility occurred is a strong indicator that the economy is burdened with growing pressures that need to be dissipated urgently before they develop into a full-blown financial crisis.

Markets were not helped by Finance Minister Asad Umar’s announcement the day before that his government was in “no rush” to approach the IMF for a bailout in the face of the country’s rapidly dwindling reserves.

And his news conference in the middle of one of the most volatile days for the exchange rate did little to address those concerns. In his remarks, he pointed out that indicators in the external sector — remittances, foreign investment and exports — all showed a gradual return to health and the current account deficit was shrinking.

He also underlined his government’s efforts to stabilise the economy in the medium term, and used the occasion to announce a reduction of Rs2 in the price of petrol and diesel.

Absent from his remarks was any clear sense of how the reserves are to be strengthened in the short term, which is a question of overriding urgency at the moment. If the government is in no hurry to approach the IMF, the market wants to know whether it is in any rush to arrange an alternative supply of dollars. Thus far, all that has been on display is immense indecision, with talk of a Fund programme today, followed by disparaging remarks for those asking for a Fund programme tomorrow.

The mixed signals and the inability of the government to decide firmly on a road forward are at the heart of the problem.

The day ended on a note of extreme caution from the State Bank of Pakistan, that poured cold water on the finance minister’s words by sharply hiking interest rates by 150 basis points, the single largest hike since the cycle of monetary tightening began.

Such a step would not have been necessary if the economy had genuinely turned the corner, as Mr Umar had asserted only hours earlier. In its monetary policy statement, the central bank spoke of “rising inflation, an elevated fiscal deficit and low foreign exchange reserves” as the “near-term challenges” facing the economy.

With borrowing from the State Bank sharply on the rise, and a near-historic jump in the first-quarter fiscal deficit, the government may be facing a potential blowout if a sharp adjustment is not undertaken rapidly, regardless of the improvement in the external-sector indicators. The time to act has unambiguously arrived, yet we still await an action plan.

Published in Dawn, December 1st, 2018


27 Nov 2021

Supporting ECP

ALTHOUGH the government bulldozed legislation on electronic voting machines through parliament, the reality is that...
27 Nov 2021

Forgiving the Taliban

IF there is one takeaway from Thursday’s gathering of more than 1,000 Shia Hazaras in Kabul, it is the call given...
Living in fear
Updated 27 Nov 2021

Living in fear

THE registration of a blasphemy case against four members of a family from a village on the outskirts of Lahore has...
26 Nov 2021

State Bank’s projections

THE macroeconomic projections listed by the State Bank of Pakistan in its annual report on the nation’s economy...
Ad distribution
Updated 26 Nov 2021

Ad distribution

If present govt can muster will to achieve this task it would set a solid precedent that no future govt would find easy to undo.
26 Nov 2021

Messy passengers

NEWS that passengers on a PIA flight from Manchester to Islamabad left so much litter on the plane that it led to a...