The State Bank of Pakistan (SBP) cut the benchmark interest rate first on March 17 by 75 basis points. It then cut it further on March 24 by another 150bps.
The rupee that began sliding on March 9 in anticipation of the rate cut hit a new all-time low of 166.13 against the dollar on March 26. In just 20 days, it lost 7.7 per cent value to the dollar.
On March 24, Imran Khan announced an economic stimulus package of Rs1.13 trillion. He also announced a Rs15 per liter cut in domestic oil prices. All this is in line with the global response to combat the Covid-19 pandemic.
The slashing of the central bank’s policy rate — now at 11pc from 13.25pc — has come at a price. In 20 days of March, foreign investors pulled off $1.28 billion from treasury bills, and another $71 million in the next five days.
Foreign exchange reserves of the SBP slipped from $12.79bn on March 6 to $12.68bn on March 13 before falling to $11.99bn on March 20.
But the government is lining up additional foreign funding. The premier’s adviser on finance, Abdul Hafeez Shaikh, says Pakistan is seeking an additional $1.4bn from the International Monetary Fund (IMF) for fast-track disbursement as part of the Fund’s ongoing $6bn lending programme. The country plans to arrange $4bn in total from different lending and aid agencies.
Penetrating deeper into export markets seems too difficult as our own country is facing a nationwide lockdown
Multi-year low global oil prices and dwindling demand may help contain the import bill despite a weaker rupee. As the human race vows to fight Covid-19 together, lending agencies and bilateral creditors may ease external debt repayment conditions.
Hopefully, Pakistan may not face a severe foreign exchange crisis as long as Covid-19 keeps the world united. But that should not make us oblivious of their duty to keep financial house in order. That means we must remain focused on boosting non-debt creating foreign exchange inflows — exports and remittances.
Covid-19 turned the world upside down in March. But even by the end of January when it was confined primarily to China, Pakistan’s performance on the fronts of exports and remittances was poor. Now the pandemic has hit the entire world forcing many countries to go for full or partial lockdowns. The IMF has warned of a global recession this year. World trade is heading toward new lows. Boosting exports and remittances now is a real big challenge.
In July-January, Pakistan’s exports showed an increasing trend in a limited number of countries, according to the SBP statistics. Prominent among them were Afghanistan, Australia, Bangladesh, France, Indonesia, Japan, Kuwait, Mexico, Myanmar, Oman, Philippines, Portugal, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom and Vietnam.
Regardless of Covid-19 lockdowns and recessionary challenges, one can hope that export growth to these 20 countries can be sustained. But how can Pakistan enhance exports to the countries where it witnessed a declining trend in July-January?
Prominent among such countries were China, Denmark, Egypt, Germany, Hong Kong, Italy, Kenya, Malaysia, Netherland, Poland, Qatar, Saudi Arabia, South Africa, Sri Lanka, Thailand, United Arab Emirates and United States. The fact that in this list we find the countries that are our main export markets is very disturbing.
Good news is that China is limping back to business. Besides, our exporters have old ties in the US market and currently Pakistan is enjoying a cordial relationship with the American leadership.
Lockdowns in cities have drastically reduced the turnout of workers at mills and factories
So enhancing exports to the United States and China may not be as difficult as to European and Middle Eastern countries that have lesser fiscal and monetary firepower to fight Covid-19. Even in the United States, uncertainty abounds as the country has now overtaken China in terms of the number of Covid-19 cases.
Notwithstanding all new and old export incentives that our exporters can now rely on, penetrating deeper into export markets seems just too difficult, more so because our own country is facing a nationwide lockdown.
Two-thirds of our export earnings come from textiles and food categories. Lockdowns in cities have drastically reduced the turnout of workers at mills and factories. Textile exporters say many of their buyers are requesting for delays in import payments and shipments.
Exporters of rice make similar complaints. Exports of meat are suffering owing to fewer orders from Gulf nations. Besides, as Covid-19 keeps spreading in Pakistan, official stockpiling and bulk buying of food grains and edible items are sure to increase. That, coupled with possible disruption in food grain supplies from farms to markets, is going to affect exportable surpluses. Enhancing exports via high-end value addition is not an option in the near future for obvious reasons.
In July-February — before Covid-19 turned out to be a pandemic — the rate of growth in remittances from the United States, United Kingdom, United Arab Emirates and Malaysia had already slowed down. The growth rate in the case of Saudi Arabia had picked up slightly. Now the United States and the United Kingdom are struggling with Covid-19–driven lockdowns and a sagging demand. Saudi Arabia and the United Arab Emirates are braving an additional issue of historically low revenues owing to a plunge in oil prices.
The Malaysian economy, like many others, is suffering from bad effects of the global economic downturn in addition to Covid-19 with all fiscal and monetary firepower. Pakistan gets more than 80pc of its remittances from these five countries.
Aiming for boosting remittances is OK, but realising this objective will require extra hard efforts. The hope for growth in remittances from four other Gulf countries — Bahrain, Kuwait, Qatar and Oman — remains slim as they, too, are faced with the same problems. Eyeing additional inflows of remittances from the eurozone seems sheer optimism, given the gravity of Covid-19 there.
Published in Dawn, The Business and Finance Weekly, March 30th, 2020