Pakistan’s forex reserves have started growing thanks to the rollover of Chinese commercial loans and the timely realisation of export proceeds after the tightening of banking rules for this purpose.

On March 3, the country’s total forex reserves, including those held by the State Bank of Pakistan (SBP) as well as commercial banks, rose to $9.754 billion from around $8.54bn on February 3. Within a month, the SBP’s reserves swelled to $4.301bn from $2.917bn.

But that does not mean crippling restrictions on imports will be removed any time soon. For that to happen, businesses will have to wait until the International Monetary Fund (IMF) releases the last tranche of its $7bn loan stalled last year. Given the uncertainty around the exact timing of the expected inflow from the IMF, these restrictions shall remain intact till the end of March. So, what next?

Pakistan promised the IMF to ease import restrictions immediately after getting the $1.1bn in the last loan tranche. This means it will have to allow banks to restart opening and financing all import letters of credit. Whenever this begins, a floodgate for the import of industrial raw materials and consumer goods will open, and forex reserves and the rupee will come under renewed pressure.

The government must regulate small businesses transparently and effectively to ensure that the inter-twined SME and retail sector — the backbone of the economy — retain stability

A sharp slowdown in economic growth should keep imports limited, but only after the pent-up demand is met. Pakistan’s economy is projected to grow no more than 1.3pc during this fiscal year ending in June from 6pc last year.

But the country’s grey economy is huge — 40 per cent of the documented economy by some estimates. And currency in circulation has doubled in eight months of this fiscal year to Rs487bn from Rs209bn in a year-ago period. This, coupled with the pent-up demand, may lead to a surge in imports, nonetheless.

The country’s retail sector is currently stressed due to skyrocketing energy tariffs, high-interest rates and “reduced business hours” under the energy-saving initiative. But most retailers remain undocumented — and even those that have come under the tax net evade taxes with the connivance of corrupt/inefficient tax collectors.

Their businesses have deep roots in the informal economy. They, among other segments of society, contribute to growth in the grey economy and thrive on it. This sector, having an estimated 18pc share of Pakistan’s GDP and employing 14pc of the country’s workforce, is the most resilient of all sectors of the economy.

But even this sector’s resilience cannot do much to accelerate economic growth in the remaining three and a half months of this fiscal year. This sector can, however, do a lot in the next fiscal year starting from July — provided the government and the central bank adopt a balanced approach of gradually and effectively documenting it and taking care of its specific needs.

Whenever the country faces an energy crisis — and it happens year after year with varying intensity — the government of the day finds it easier to order early closure of businesses in the name of energy saving.

Researchers and energy analysts have provided empirical evidence that this form of energy saving is the least productive and that better options are available. The present government must set a precedent now and refrain from forcing retailers to close businesses earlier than normal.

Ramazan is around the corner. If retailers are allowed to run their businesses full-time, the resultant increase in their sales will help millions of people keep their jobs, support economic growth to some extent and increase the much-needed revenue collection.

Structural issues of retailing, meanwhile, need to be addressed through a comprehensive retail business policy. That policy must be framed taking into account (1) the need to bring in more and more retailers under the tax net and (2) the need to promote small and medium enterprises (SMEs) engaged in trading in particular but all micro SMEs in general — through all available means. As of September 2022, SME financing constituted just 5.4pc of the total private sector bank financing, according to the SBP.

The SBP must ensure that banks increase this percentage rapidly in the coming years. If that does not happen, the retail sector will gradually lose its resilience. The federal and provincial governments must regulate SMES more transparently and effectively to ensure that the inter-twined SME and retail sector — the backbone of the economy —retains its resilience.

During the first seven months of this fiscal year (July 2022-Jan 2023), banks financing to the retail sector remained negative by Rs6bn —thanks to high interest rates and banks’ persistent focus on manufacturing and consumer financing, the latest SBP data reveals.

And as of June 2022, retail financing constituted just 2.8pc of banks’ overall financing to private sector businesses. This percentage is too low. The SBP must ensure that banks increase their lending to retailers.

Banks’ reluctance to offer loans to SMEs and retail businesses impedes the process of documentation. Over the years, the number of SMEs and retail establishments that have been brought into the tax net has increased in absolute terms though most of them are yet to be documented.

But this can happen only if banks’ financing to SMEs and retailers also grows noticeably at the same time. Sadly, that is not happening. The number of retail outlets is estimated to be two million. A vast majority of them pay energy bills. Banks may design some financing products for the retailers using their energy bill payment history as the core of their creditworthiness. Provincial governments and banks may join hands to find some pragmatic way to provide solar energy loans to tier-I and tier-II of retail establishments.

Published in Dawn, The Business and Finance Weekly, March 13th, 2023

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