Recently, the rupee lost roughly 20 per cent value within seven trading sessions. It fell from Rs230.89 to a US dollar on January 25 to 276.57 per dollar on February 3 in the interbank market. The rupee lost this much value in just seven working days as the State Bank of Pakistan reintroduced market-driven exchange rates from January 26 on the International Monetary Fund’s (IMF) insistence.
Foreign exchange reserves held by the State Bank of Pakistan (SBP) also fell from $3.678 billion on January 20 to $3.086bn on January 27, enough to cover less than three weeks of imports against the standard minimum of three months.
Just three months ago, the central bank had about $8.6bn reserves. But external debt repayments, amidst drastically low external financing and declining exports and remittances, gradually brought the reserves down to the present low level.
This happened despite severe curbs on imports that left thousands of import containers stuck up at Karachi Port and dried up inventories of imported items across Pakistan as forex-starved banks refused to entertain imports letters of credit.
If IMF-sponsored fiscal reforms are undertaken, urgently needed forex funds will flow in and the foundations of better economic governance can be laid
The Fund will disburse the last two tranches of roughly $1.9bn together out of a $7bn stalled loan programme. It will possibly also agree on a new, larger loan. Pakistan needs to secure a new, larger loan immediately after the current Extended Fund Facility ends in June to avoid default on external debt repayments and to augment its paltry forex reserves.
Once the IMF lending restarts, it will set the stage for Pakistan to receive much-needed forex support from the world — including international financial institutions, foreign commercial banks and foreign investors, as well as friendly countries like Saudi Arabia, China and the UAE.
So, one can hope that the current, worst phase of the ongoing forex and economic crisis will be over in the near future. The twin crises will hopefully start losing intensity after a while, depending upon how quickly and impeccably all “tough” IMF conditions are implemented.
The IMF is demanding transparency in assets accumulation of civil bureaucracy and in the “non-combatant” military budget. The Fund is also insisting on ending all the subsidies on electricity and gas, including those available to exporters, a rise in petroleum development levy on petroleum products and a 1pc across the board increase in general sales tax — from 17pc to 18pc.
These are the kind of things that need to be done to achieve the most-needed fiscal discipline, contain the circular debt of the energy sector and make our export sector shun its reliance on subsidies. But these measures will likely push inflation further up in the short and medium term.
Years of lack of fiscal discipline have resulted in the growth of domestic and external debts, crowded out the private sector from commercial bank borrowings and affected its productivity. In recent years, unprecedented growth in domestic and external borrowings has been devouring the bulk of yearly tax revenues.
In the current fiscal year, due to end in June, the government expects that roughly 70pc of tax revenue (Rs5.2 trillion out of Rs7.47tr) will have to be spent on domestic and external debt servicing. On the other hand, low productivity of the private sector has resulted in low or no growth of exports, compounding the external sector problems and putting pressure on the balance of payments.
Now, if bitter pills are swallowed, and the IMF-sponsored fiscal reforms are undertaken, this should pave the way for the urgently needed forex funds in the short run. In the long run, these reforms, along with some home-grown reforms aimed at enlarging the tax base and restructuring state-owned enterprises, may lay the foundations of better economic governance. The Federal Board of Revenue believes there is a tax gap of around Rs1.3tr. Pakistan Business Council (PBC) believes it is even larger — no less than Rs1.5tr.
The PBC says that agriculture and the real estate sectors and wholesale and retail trade are taxed according to their potential. If under-invoicing at all stages is checked, the country may receive an additional Rs1.5 trillion every year.
Closing such a massive tax gap requires tough political decisions. And that is why leaving bad, unproductive politics behind is necessary. What is equally necessary is a better, more balanced civil-military relationship that does not weaken or threaten the growth of democracy.
The economy is crying for good, productive politics.
The twin forex and economic crises have so far led to the full or partial closure of hundreds of thousands of businesses and left over a million people jobless. Inflation in January hit a 48-year high of 27.55pc, and after the rupee depreciation and increase in fuel oil and energy products, it may peak at least around 29pc. The economy, meanwhile, may grow just 1.5pc during this fiscal year, according to the government’s latest projection, down from 6pc last year.
Published in Dawn, The Business and Finance Weekly, February 6th, 2023
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