PAKISTAN has experienced at least 12 episodes of balance-of-payments stress and outright economic crises since 1988 — and is in the vortex of yet another one. A silver lining of sorts of spending much of the past 34 years in crisis mode has been that it produced a generation of policymakers adept at crisis management. At the same time, it gave birth to a standard playbook that has been employed successfully myriad times in the past to prevent balance-of-payments difficulties slipping into a wider debt default.
The most severe previous balance-of-payments crisis was in 1998 when Pakistan was forced to respond to India’s provocative testing of its nuclear devices, and was sanctioned by the US as a result. Foreign exchange reserves plummeted, officially covering a few weeks of imports, but in actuality were precariously lower. Saudi Arabia stepped in with an oil facility on deferred payments basis (later converted into a grant), while foreign banks operating in Pakistan were tasked to bring inflows of special foreign currency deposits known then as FE 45 ‘swaps’. These short-term deposits were provided a guaranteed exchange rate and were invested in high-yielding government securities (essentially akin to ‘hot money’), and proved to be a lifeline for the country till the IMF was allowed to deal once again with Pakistan.
While Pakistan successfully navigated that period, it was not entirely without blemish. Policymakers were compelled to take a historic decision of freezing individual foreign currency accounts in 1998, severely jolting the confidence of resident as well as non-resident Pakistanis that echoes to this day. Nonetheless, imports of petroleum and other essentials continued, and the lights remained ‘on’ throughout the country for the most part, under the most challenging of circumstances. Inflation was high, but the country’s citizens did not directly experience rationing for the most basic commodities and items.
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Fast forward to 2022, and Pakistan is experiencing yet another challenging situation, a multipronged economic crisis that ticks many boxes and is unprecedented in its severity as well as complexity (see my article ‘A crisis like no other’ in this newspaper dated May 8, 2022).
Stronger leadership and improved communication are needed, along with broader policy options.
A new generation of policymakers is at the helm, lacking in crisis management experience. Even though they have had to deal with the situation from a handicapped position due to the unfavourable external environment, some of their actions (and a lot of their inaction) has compounded the effects of the crisis on markets and investors.
For starters, both the Ministry of Finance as well as the State Bank have been behind the curve in their policy response, not just in terms of shutting down non-essential imports but also in arranging non-traditional external financing. (Kudos to the finance minister for arranging the shares sale with buyback deal with a foreign government, but there are more options that should have been explored — as discussed below).
The slow (and reactive) response has been compounded by poor ‘strategic’ communication with financial markets, including international credit rating agencies and bond investors, and other interested parties such as business associations, think tanks, foreign governments, etc. Wishy-washy statements that have not been clear nor confidence-inspiring have been issued, while the State Bank has been missing in action too preferring vlogs to more decisive communication, including more frequent face-to-face meetings with senior leadership of banks and the analyst community.
The finance minister has to give clear, confidence-inspiring statements at least a few times each week to selected forums (especially to business leaders) and media, reiterating: i) that the country will not default; ii) there will be NO freezing of $/RDA accounts; iii) outlining the reasons for delay in the IMF programme resumption; and, iv) what contingency measures he has already lined up to deal with the situation till early/mid-September.
The absence of a full-time, experienced State Bank governor is also impeding the response to the crisis. Ideally, for greater credibility, communication with the markets should be conducted, on occasion, jointly by the finance minister and the central bank governor under circumstances such as these.
The finance minister (or the prime minister, who has also been missing in action, demonstrating weak leadership) should also form a smaller economic advisory group, consisting of a handful of economists and former State Bank governors who have dealt with past crises, to assist on a near-daily basis. A large and unwieldy Economic Advisory Council that has not met even once is certainly not going to be helpful.
The State Bank appears to have moved belatedly to a ‘positive list’ for imports (temporarily allowing only essential imports) — a recommendation I had made in early April, and which should have been implemented much earlier. Similarly, measures to incentivise exporters to remit proceeds faster were taken with a lag, while action against currency speculators does not appear to be as decisive or prompt as in the past.
In terms of imports from China, the currency swap line remains underutilised and the State Bank should seek to convert the payment currency for imports to yuan to the extent possible. This may require government-to-government negotiations and assistance from China’s PBOC.
Government efforts for fuel/energy conservation need to be stepped up, even at the cost of increased load-shedding for the domestic sector. In terms of external financing, work on ‘securitising’ worker remittances should have begun in April or early May latest, which can potentially raise $3-4 billion. Pakistan has utilised this option in the 1990s.
Finally, the government appears to have missed a trick with regard to financing from IMF. If it had anticipated that it would have to delay the prior actions required to resume the programme till after the Punjab by-elections, it should have applied for a Standby Credit Facility from the IMF early on to bridge over the two to three months till approval by the Executive Board of the seventh and eighth reviews. This would have assured the markets and allowed for more orderly conditions for the rupee.
The bottom line is that more meaningful action can be taken to stem the panic in the markets, starting with more purposeful communication.
The writer is a former member of the prime minister’s Economic Advisory Council.
Published in Dawn, July 28th, 2022