An illusion of recovery?

A sense of economic recovery is being created which in fact may be artificial. Many within the PDM (Pakistan Democratic Movement) camp who earlier criticised finance minister Miftah Ismail are now his cheerleaders.

The finance minister is only attempting to do his job best, given the difficult circumstances. But nothing has changed fundamentally. Sentiments have been overplayed by both sides. Earlier, the fear of default was overplayed by opposition commentators, and now it is the euphoria of recovery.

PKR/USD rose from 178 to 240 and has now slid back to 215. The question is where it will settle once imports normalize; and whether the economic impact of supply chain disruption due to import control will be disastrous. First, currency depreciation was due to abnormally high oil import bill, imported as it was at peaking prices.

And now, imports have been squeezed artificially by exercising extreme care in issuance of fresh LCs and negotiations. Moreover, oil imports were lower last month due to the attempt to build up inventory. Sooner or later, these unsustainable interventions will trend back towards normalcy. But the new normal could be very painful in terms of loss in employment and low growth.

Numerous industries are suffering due to SBP’s (State Bank of Pakistan’s) informal ban on imports. Auto industry is running on half capacity, and on single shift. The story of smartphones assembly is no different. But the impact is not limited to these two industries.

The disruption is across the board. White goods manufacturers are facing similar issues. If someone has been allowed to import kits at reduced quota, the same player may not be allowed to import compressors.

Even textile exporters are facing the brunt. Machinery imports are temporarily banned; and players are not even allowed to import spare parts. That means an out-of-order machinery will remain unusable in the short term. That would have an impact on export proceeds.

Moreover, demand for denim and home textile is down due to demand slowdown in buyers’ destinations. This will not only hurt the export proceeds; but may also result in job losses.

A manufacturer of power sector inputs — in transmission and distribution chain — foresees partial or full closure of factories in the next couple of months as fresh raw material import is not allowed — while the inventory is fast depleting. The company might have to reduce its employees’ strength and to work on a new normal.

The situation was not much different during Covid lockdown. Factories were closed or working on limited capacity. But there was government and SBP support at that time. The IMF was also accommodative. Interest rates were reduced to half.

Concessionary wage financing scheme was offered. Loan repayment was allowed to be deferred for a year. Now the situation is exact opposite. Interest rates have doubled. Loans are hard to come by. Businesses’ credit lines are choking, with no hope for concession whatsoever. The outcome could be ugly.

Construction is the top employment provider (excluding agriculture) and witnessed a massive growth in the last two years. Now, not only the higher input prices are making construction dearer, but the supply chain shortages are also impacting the steel industry. The industry is facing problems in importing scrap. Soon, many would be unemployed in the sector.

Then, telecom which was growing smoothly and disrupting the market in the last decade or so is now making an SOS call. There is a perfect storm brewing in the industry and experts are fearing a digital emergency. Other services sectors are suffering too. Any payment to be made outside Pakistan is extremely challenging.

The point is that there is a much wider impact of choking imports in terms of choking the economy. Unfortunately, given the political mess and global economic realities, SBP and finance ministry don’t have much of a choice. They are doing what they are required to do. But there is nothing to be cheerful about this. And any euphoria is going to be short-lived.

There is a huge lag of payments. SBP has an undeclared ‘go slow’ policy so far as outward payments are concerned. Informal quotas of imports in certain industries may supposedly last till September. However, this is likely to continue till December which will create further backlog and unemployment.

Whenever this opens, there would be pent up demand to wash all the gains on the current account balance. Till such time imports are low, there would be low current account deficit. But there would be low tax revenues – almost half are collected at imported stage. This may result in mini budgets. There would be more tax on formal sector and its salaried employees. Only traders are lucky in the PML-N (Pakistan Muslim League-Nawaz) regime.

This feel-good factor can be stretched for a few months. Surely, this cannot sustain till June next year. This means if the government intends to continue till June, PML-N would surely further lose its popularity. PML-N Quaid Nawaz Sharif has a window of couple of months to call it a day.

The only silver lining is in the shape of lower oil prices. If the prices tumble in the next few months, imports can be normalised before it leads to a crisis. It is not a very wise punt to take, especially for policymakers.

A better option is to distance itself from growing unemployment in a year of decade-high inflation. And this would lower political uncertainty as PTI (Pakistan Tehreek-e-Insaf) with growing popularity is demanding ouster of coalition government. Moreover, IMF board’s approval is expected by the end of the month. The political scene may unfold by October latest.

Copyright Business Recorder, 2022