THE transfer of no-strings-attached funds of $2.8bn from the IMF later this month will bolster Pakistan’s foreign exchange reserves at a time when the rupee is under pressure. The new IMF dollars being credited to the lender’s members from the recently approved allocation of $650bn to boost global liquidity at a time of a disastrous pandemic will also help moderate Pakistan’s requirements for expensive commercial loans to meet its financing needs this year. But if Finance Minister Shaukat Tarin wanted to send a message to the market to calm it and ease pressure on the exchange rate by making the announcement on Thursday, it didn’t work. The rupee continues to be traded at the 10-month high of 164 to a dollar. It has been weakening since May when the current account deficit began to widen due to rising imports and debt repayments. The current account surplus achieved in early FY21 turned into a deficit of $1.8bn by the end of the fiscal. The State Bank estimate of the current account gap broadening by 2pc-3pc during the ongoing financial year as the government pushes for higher GDP growth, and with the IMF programme being in ‘recess’ over differences on budget strategy, the market is anticipating the exchange rate to weaken further.

As previously, the economic growth momentum and industrial recovery are also being supported by imports, which were more than double the exports in the last fiscal. The trend continues, with the trade deficit ballooning by 81.4pc to over $3bn in July. Despite fears of renewed pressure on the foreign exchange reserves, funded over the last couple of years through expensive borrowings from commercial sources, State Bank governor Reza Baqir is confident that the present economic recovery will be accompanied by external-sector stability. He has repeatedly discounted fears of a boom-and-bust cycle making a comeback soon, saying the current account deficit should be cause for concern only if followed by a depletion in reserves, which are sufficient to support a moderate GDP expansion of 4pc-5pc. He is also not worried about the weakening exchange rate, calling it ‘natural’ when the current account deficit is expected to increase.

Indeed, the country’s foreign exchange reserves are at a ‘comfortable’ level for now and the projected current account deficit for this year remains manageable, with financing needs, according to Mr Baqir, “more than fully met”. Nevertheless, the rupee is expected to remain under pressure on projections of imports surging even faster than last year to meet the domestic demand for food, machinery, raw material, etc, fuelling price inflation further. The sustainability of the government’s push for growth will continue to be questioned amid doubts about the medium- to long-term external-sector stability unless it is able to narrow the trade deficit — not by curbing demand but by boosting exports — and convincing foreign parties to invest heavily in this country’s future.

Published in Dawn, August 14th, 2021