EDITORIAL: Acting Governor State Bank of Pakistan, Murtaza Syed, while responding to a foreign news agency in writing stated Pakistan will meet the 33.5 billion dollar external needs and the “unwarranted” market concerns about its financial position will dissipate in weeks.
The use of the word “unwarranted” appears to be inappropriate as market concerns are very much warranted, given the ground reality of huge losses being incurred by importers of critical food items/raw materials/semi-finished products due to acute shortage of foreign exchange in banks that, in turn, is throttling the supply chain within the country — from the ports to the market.
The 15 percent discount rate (with the available rate for the private sector between 4 to 5 percent higher) while the regional average is now one-third the rate in Pakistan will have serious negative repercussions on its exports.
Murtaza appears to have also downplayed the external financing needs of the country by stating that Pakistan’s public debt profile, the main flashpoint for markets these days, is a lot better than in other vulnerable countries with high public debt, given that Pakistan’s debt to GDP ratio is 71 percent, maintaining that “Pakistan’s external debt is low, of relatively long maturity and on easier terms since it is heavily skewed towards concessional multilateral and official bilateral financing rather than expensive commercial borrowing.”
This too is an inaccurate statement for three broad reasons. First and foremost, the June 10 budget document indicated total foreign assistance of 3.166 trillion rupees which included 1.389 trillion rupees from foreign commercial banks (44 percent of the total) — a figure that was updated in the first week of this month to 5.503 trillion rupees (the addition from projected release of 558 billion rupees from the International Monetary Fund), 558 billion rupees from Saudi Arabia (time deposits) and 774 billion rupees from China deposit which ceterus paribus (other things remaining the same) implies a quarter of all external loans will be procured from commercial banks — a significant amount.
Second, debt equity is not taken into consideration which was budgeted at 560 billion rupees for 2022-23 against 372 billion rupees in the outgoing fiscal year; and finally, as per the budget, the outstanding position of government of Pakistan guarantees was 6.876 billion dollars at an exchange rate of 183 rupees to one dollar with the power sector accounting for 78 percent, aviation 9 percent, while total executed guarantees (July-March 2022) including fresh/rollover/letters of comfort aggregated to 0.5 percent of GDP. It is little wonder that independent economists are warning of the distinct possibility of sovereign default unless we correct course and drastically reduce the current expenditure.
While finance ministers around the world routinely engage in presenting favourable pictures of their respective economies that may be over-optimistic partly with the objective of driving the market sentiment towards the positive arena and partly for political reasons yet governors of central banks dedicated to steering the countries’ monetary policies to deal with shocks associated with the money market as well as inflation are typically restrained in their comments and as and when they do make statements they limit themselves to presenting hard facts/data.
While we recognise and appreciate the governor’s effort to placate sentiment and quell negative speculation on the social media but term market concerns regarding dearth of dollars as unwarranted belies the ground reality where banks are hard-pressed to negotiate import documents and importers are facing demurrage on their imports due to delay in clearance of their goods.
Copyright Business Recorder, 2022
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