The government finally, at least on paper, started talking on the increasing balance of payment concerns. This column has been advocating immediate actions to be taken to arrest the falling foreign exchange reserves. It is indeed good to see government’s economic machinery, starting to debate and analyze the options the country has.
Economists, analysts and bureaucrats - not part of sitting government, have been emphasizing on currency adjustment for years now. On the flipside, virtually all government officials, BR Research met, agree with currency adjustment off the record. On it, they have echoed Dar’s mantra. Once out of the office, many start advocating for currency depreciation. A recent example is an opinion piece by Ex finance Secretary, Waqar Masood, criticizing the burning of hard earned SBP foreign exchange reserves to keep currency value intact.
However ironic it maybe, he is spot on. Yes, the impact of currency depreciation on exports is not clear; but there is no justification of depleting reserves just to keep the price equilibrium at government’s desired levels.
BR Research understands the political limitations of new PM, who also chairs the ECC. This column has written about number of solutions other than currency adjustments in the past few weeks. Such as upward revision of petroleum products prices (read: ‘Options for Dar and Abbasi’ published on August 30,2017), going back to global debt market (read: ‘Policy tightening is unavoidable’ published on August 23, 2017), monetary tightening, and administrative measures to curb imports and fiscal incentives to promote exports.
But the political situation was too messy and finance minister was too busy in handling corruption cases against him, economic management was simply at the back burner. But now, there seems to be some urgency in dealing with growing external vulnerabilities.
Recently, Ministry of Finance has coined up the option of raising $1 billion from sovereign Sukuk issue. The ministry is seeking to appoint financial advisors by 15th October. It’s a welcome move, a bit late, however. The government last issued similar bond at 5.5 percent yield in Oct16. Lately, the international market is receptive to sovereign bonds issuance as the response to countries such as Iraq and Argentina was overwhelming. It seems that Pakistan might not have any issue in raising much needed money.
Also earlier this month, Ministry of Finance briefed the PM that keeping the petroleum prices low is a flawed policy and that has resulted in 25 percent increase in gasoline consumption during FY17. Accordingly to ministry’s calculation, prices in Pakistan, on average, stood at $0.61 a litre compared to $0.93 in India, $1.51 in Turkey, $1.12 in Bangladesh and $0.88 in Sri Lanka. The comparison was no different in 2015 as well. Mind you, many of these countries’ currencies depreciated against USD in the past couple of years, making petrol cheaper in Pakistan.
It’s high time to correct the policy and the petroleum prices should be increased to curtail demand. The other advantage of higher prices could be more tax revenues to slash fiscal deficit. The need is to increase PL as that is not part of the divisible pool and may help federal government to curb the consolidated fiscal deficit seeing provinces are in no mood to show budget surpluses.
In a recent ECC meeting, the Privatization Commission has been advised to submit a viable plan for privatization of Pakistan Steel Mills. Hopes may well be on the lower side, efforts to work on a viable plan is encouraging for an otherwise dormant ministry.
The Ministry of Finance is apparently relying on short term borrowings to not let the foreign exchange reserves to slip further. The decline of reserves is halted as the toll is up by $400 million in the last two weeks, which is encouraging. The recent numbers of exports, FDI and remittances are showing some growth as well. However, the quantum of imports is too big to make even double digit growth in foreign exchange earnings avenue peanuts.
The problem, even with all the renewed efforts is that the day before Pakistan goes back to the IMF may not be too far. However, seeing the deteriorating relationship with US, there are chances of imposition of some sort of US based sanctions on Pakistan. And if that happened; would the fund entertain Pakistan?
What alternate options does the country have? Will China come to rescue us for the balance of payment crisis? Will other multilaterals (WB, ADB etc) continue to support Pakistan? Well, lately ADB has approved infrastructure loans for KPK and Sindh government. But the change of heart can happen anytime.Times are unpredictable; let’s hope the worst does not happen.
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