Challenge of liquidity crunch

ARTICLE: FY2020 was probably one of the most difficult years in the history of Pakistan. The outbreak of Covid-19 has brought even some of the advanced economies to their knees.

On a positive note, Pakistan witnessed a sharply reduced current account deficit, helped by Saudi-deferred oil facility, lower oil prices and fiscal support. Despite tough conditions in the Middle East, remittances nevertheless extended good support and are likely to hit a new all-time high to close FY20 at about $ 22.5 billion, as the Pakistani Diaspora has cut their spending sharply opting for savings and officially remitting them regularly. Another remarkable achievement is decline in derivatives' numbers that surged to around $ 8 billion; it has declined to $ 5.535 billion after dipping to $ 2.8 billion and then recouping to fill the gap created by SCRA outflow of $ 4 billion plus.

Following the outbreak of the virus, with the support of G20 and the IMF, the government has taken several fiscal and monetary measures to reduce the impact of the pandemic on the economy. The government has allocated Rs 144 billion for Ehsaas programme and has so far provided cash funding of over Rs 130 billion. It has reduced the electricity rates, arranged special flights for overseas Pakistanis stranded abroad, etc.

On the monetary side, sensing urgency, SBP was quick to act by offering cheap financing facilities to support businesses and its workers though various financing schemes. It has sharply reduced its policy rate by 625 basis points to support cheap funding that should help slow down the surge of non-performing loans (NPLs).

Challenges in fiscal year 2021

However, there is a huge risk that if trans border movement of goods remains suppressed and selective in activity due to fear of pandemic, the economic depression will not ease.

Pakistan's fiscal managers should think about and act quickly ahead of possible food shortages. Swarms of locusts are already a cause of misery and remain a threat to food production. The major crop, wheat, is estimated to be short by nearly over 2 million tonnes. Cotton production has been extremely disappointing and will add pressure on precious foreign exchange reserves.

Growth in import will remain slow, as export-related imports will remain sluggish due to global slowdown. Another round of possible softer to stable oil prices around current levels in the international market in the next two quarters could help.

But the crux of our problem is the severe liquidity crunch. This writer is still unable to understand why the government and opposition do not discuss the core problem. Why the politicians never discuss the breach of the fiscal responsibility and debt limitation law (98.2%, which is 92.2%, minus 6% Public Sector Enterprises).

The current fiscal will close with PKR at current levels (168.1895) means, in FY20, it has weakened by 5.4% that could further push the GDP down with the external debt higher by Rs 925 billion (current). It may push total debt and liabilities beyond 100%.

Down the line, the risk is, that if the pandemic lingers on until December 2020 or beyond, as reported by the WHO, IMF and WB. It will cause more economic misery. Like all other economies, Pakistan's too will suffer immensely. Our problem is that we are totally dependent on foreign borrowings and cannot generate rupee liquidity to meet our domestic requirements, because we are not allowed to print money under the IMF covenant. Hence, neither exports will come to our rescue, nor can we depend on meeting FY21 revenue collection target of Rs 4.9 trillion.

Indications are that in FY21 liquidity constraints will continue to bother. Pulling the M2 target down to a desirable level means it will hurt exports, slow down economic activity and weaken revenue collection. Support from home remittances will gradually slip from 4th quarter onwards unless oil recovers.

SBP/MoF can address the liquidity situation by reducing T/bills target to below 40% of commercial bank deposits and by widening the interest rate corridor by 2%.

Only hope is that the time given/agreed by G20 and IMF to delay debt/deficit financing is extended for another year or two, which is temporary. To reduce the impact of pandemic and financial challenges, Pakistan has to arrange/create liquidity and should talk to the IMF for budget deficit waiver in FY21, which also means allowing M2 to extend to 17-20%.

(The writer is former Country Treasurer of Chase Manhattan Bank)

Copyright Business Recorder, 2020