A reality check on country’s fiscal status

The whole of the past week witnessed massive hammering of rupee (PKR) vis-à-vis the US dollar in the currency market. The PKR went beyond 226 to a dollar during intra-day trading amid renewed political uncertainty that wrecked market confidence and also gave “speculators” some additional fodder.

The State Bank of Pakistan (SBP) described the fall as an international phenomenon due to strengthening of the US dollar (USD) on account of which, the most advanced and emerging market currencies across the world took a hit. The SBP also stated that PKR depreciated against the USD by 18 percent since the beginning of this year with a steep fall since April this year and added that when evaluated in real effective terms against a basket of currencies in which Pakistan trades and adjusts for inflation, the depreciation in the PKR this year has only been 3 percent.

“This is a better measure of the strength and competitiveness of a currency than the USD rate”. The same argument was presented by the incumbent Finance Minister while addressing a press conference this week in the wake of the free fall of Rupee that triggered panic in the market.

Both these arguments could be true, albeit partially. These arguments do not hold much ground and sound convincing when one analyses the ground realities. No doubt on account of the pandemic followed by the Russian-Ukrainian war, global economies have spun into turbulence and some economies moved towards near default-like situations. Likewise, it has some effect on Pakistan as well, but ours is a much more complex and self-inflicted malaise.

For referral one may look at the region where Bangladesh experienced depreciation of its Taka by 1.74 percent against the USD, one of the lowest among its major trading partners in Asia like India, China and Vietnam. In the last three months, China experienced 6.31 percent currency depreciation while India and Vietnam registered 2.32 percent and 2.62 percent decline, respectively. Pakistan’s currency — since the beginning of the current year — depreciated 18 percent, which is a far too high decline against the said regional benchmark. There is much more to it than the reasons presented by the incumbent government and SBP.

Fragile and unstable fiscal situation of the country is the main reason. High energy import prices are pushing the country to the brink of a balance of payments crisis. Foreign currency reserves have fallen to as low as USD 9.8 billion, barely enough for five weeks of imports. The Pakistani rupee has weakened to record lows. Debt is surmounting. The incumbent government needs to cut spending rapidly but nothing significant is visible. A good 40 percent of the country’s revenue is spent on interest payments. To move out of these dire straits the IMF deal is crucial - which has taken far too long to culminate in an agreement, creating panic and uncertainty in the financial market.

It has been announced by the Fund itself that the staff level agreement has been reached with the IMF. However, the IMF wants to avoid a funding gap after its own loan disbursal. It is looking to assess commitments by the Saudis and other friendly countries to financing Pakistan. Pakistan needs at least $41b over the next 12 months.

The government expects inflows of $4 billion from unnamed friendly countries to help bridge its financing gap in 2022-23. The country’s gross financing requirements for the current fiscal year are around $33 billion, which is a tall figure. On top of all these undeniable fiscal realities the ongoing political uncertainty is adding to negative sentiment in market. Additionally, Fitch Ratings’ downgrade of Pakistan’s outlook added to the pressure.

Government’s optics of looking at 3 percent PKR depreciation of foreign currency mix as against 18 percent depreciation against USD is unrealistic and of no consolation. Most of the transactions are in USD. The reality is that industry and businesses are finding it increasingly difficult to continue, banks are short of USD and future transactions are being offered at a rate of 240 PKR to one USD.

President of the Federation of Pakistan Chambers of Commerce and Industry has said that the volatility in the rupee-dollar parity has pushed “many factories” to the brink of closure. “This should be treated as an economic emergency by all stakeholders,” he said. Similar are the sentiments of the Overseas Investors Chamber of Commerce and Industry.

The newly-elected President of Sri Lanka, Ranil Wickremesinghe, while giving an exclusive interview to CNN this week, stated that the country’s previous administration was “covering up facts” about its crippling financial crisis and that the former leader, Gotabaya Rajapaksa, and his government did not tell the Sri Lankans truth that Sri Lanka was “bankrupt” and “needed to go to the International Monetary Fund (IMF)”. When truth surfaced on the streets of Colombo it swept away the perpetrators of the falsehood and in less than a week it was all over for a dynasty that had governed the nation for decades. They were perceived as ‘invincible’ politicians. They, however, failed to fathom the breaking-point of the otherwise highly literate, polite and docile population of Sri Lanka. Many leaders in the past, intoxicated with power, failed to judge the breaking point of their people and paid a heavy price for their ignorance. When all state institutions fail to deliver, the people invariably rise to the occasion.

Copyright Business Recorder, 2022