Austerity is the only option?

The illusion of economic recovery has already started unraveling. The prime indicators of economic sentiments in the eyes of the public are PKR-USD parity and petroleum prices. Without debating on the shallowness of perception based on these indicators, the signs of reversal are already visible. PKR, which had improved to the level of 207 against one US dollar in the open market by the last weekend, is now hovering around 219. The appreciation of the PKR has also stopped in the interbank market as well.

This all started with the upward revision in petroleum prices last week, as against the falling international oil prices and appreciating PKR, which is followed by the dramatic distancing of the PML-N leadership — Maryam and Nawaz — from the decision. That had casted doubts on the perceived political stability and the writ of the incumbent government.

Then the very next day, a news item in a top English-language newspaper quoted the government’s LoI (letter of intent) to the IMF that forex sales will not be used to prevent a rupee depreciation trend driven by fundamentals. This news item was widely circulated; it also attractedcomments from banking treasurers. And the result is lesser inflows in the second of half of last week as exporters, again, started slowing the inflows.

The point to make here is that neither of these two political and economic news is new, nor would these have any impact on the fundamentals. The fact of the matter is that the SBP’s (State Bank of Pakistan’s) forex reserves are below $8 billion and are barely covering a little over a month of imports. The fact of the matter is that non-oil imports are suppressed by using administrative measures of rationing of L/Cs opening by SBP while oil imports are less due to building inventory at peak prices. Both of these are to be normalized in due course.

There are imports pressures in the pipeline. SBP is very selective in allowing retiring of L/Cs for goods which are already at the port. Then the rationing is on opening of L/Cs, which would reduce the pressure in coming months. These steps are required in the absence of other flows. But these are not without some hidden costs. The supply chain in many businesses is adversely affected and would result in lower growth and job losses. Then the pending payment pressure of L/Cs waiting to retire, and those against the services, would keep the interbank market under pressure.

The imports number — based on actual imports (published by Pakistan Bureau of Statistics) — stood at $4.99 billion in July (down by 37 percent from the previous month). This was one of the news to generate economic euphoria. The prime decline is in oil – down to $1.5 billion in July from $3.7 billion in June. The monthly average in the previous twelve months was $1.8 billion.

It’s important to highlight the repercussions of these decisions of highest imports at peak prices. No matter what was the outlook in June, there was no rationale to build inventories when prices were at highest level since 2012. It is completely illogical and exhibits incompetence. There is ripple effect due to this. The payments of these high imports at peaking prices in May and June were continued in July. That had put immense pressure on the currency. Some L/Cs opened back then were retired at over Rs240/USD. All these payments at depreciated PKR level are responsible for the increase in petroleum prices in the last week which, as mentioned above, jolted the hollow confidence.

Apart from oil, the decline in imports is mainly due to not allowing informal opening of L/Cs. For example, mobile phone imports stood at $32 million last month as compared to normal levels of $180-200 million. There is a saving of $160 million. Then the savings from less car imports (in CKD form) is around $80 million. There are many other items. These will normalize once the government starts to open — with some pent-up demand in earlier months of opening.

The imports reduction due to not opening of L/Cs is on future payments. The other element of not allowing L/Cs to retire where shipment is already at port on en route is piling up. And due to queuing of services payments — including freight forwarding and travel. These will not let the current account deficit (based on payment) reflect the actual imports for some months.

These payment delays have their own repercussions. Exporters were finding it hard to book on C&F basis last month. Then the travel agents are finding hard to pay to airlines. This issue is being faced in other countries as well. Dubai-based Emirates, for example, has suspended flights to Nigeria due to challenges in repatriation of funds. Pakistan is carrying the same risk. Those who are booking flights from Pakistan are getting full fares without any discounts. Prices are exorbitant. This will continue.

Apart from the problem in services imports and goods, the remittances and exports are not shaping up either. There is visible decline in both. Exports are falling due to a slowdown in importing countries while in some cases, non-availability of raw material and machinery parts is causing dent. The remittances are closely linked to travel. In 2020 and 2021, the inflows were high from the formal channel due to lower travel. Now with travel opening, the remittances are low as well. The flows which used to come in for real estate investment are stopped as well. And the slowdown in sending countries is not good for remittances either.

All these factors challenge the government’s claim that it would improve current account in this fiscal year. And the economic slowdown will lower economic growth and taxation collection. Already there are talks of mini budget coming very soon. The floods are adversely impacting the outlook on agriculture production — especially cotton, where it would put pressure on imports. Meanwhile, food supply chain disruptions due to floods would have an adverse impact on already high inflation.

The bottom line is that there is no economic recovery per se. There is, therefore, no occasion for jubilation; certainly not for celebration. And it’s going to be a tough year. Austerity is going to be the order of the year.

Copyright Business Recorder, 2022