EDITORIAL: The strengthening of the Pakistani rupee vis-a-vis the dollar since the appointment of Ishaq Dar as the Finance Minister is somewhat eclipsed by the downgrading of Pakistan’s rating by Moody’s to Caa1 (judged to be of poor standing subject to very high credit risk) from B3 (obligations considered speculative and subject to high credit risk due to financial instability or holding inadequate cash reserves to meet their needs, debt or other financial obligations) as well as the release of the World Bank report the same day titled “Pakistan Development Update: Inflation and the Poor” which downgraded the growth rate to 2 percent for the current year.
This downgrade may make the issuance of sukuk/Eurobonds to generate funds to meet the country’s debt and budget requirements from between 2 to 3 percentage points higher than with a B3 rating. And this would be irrespective of the Ministry of Finance disputing the rating downgrade or challenging a report by any multilateral suggesting a scaling down of the budgeted growth rate.
Prime Minister Shehbaz Sharif noted in his recent press conference that the decision to determine the causes of the rupee erosion against all major currencies was taken under his direction, a report which revealed several banks’ complicity to generate windfall profits – a determination that led the banks to summarily withdraw from this activity, accompanied by private sector speculators offloading their dollars on the market that, once offloaded, would bring the rupee gains to an end.
Until and unless economic fundamentals improve it is unlikely for the rupee to retain its strength and sadly these fundamentals, which require implementing politically challenging reforms, remain a source of concern to this day.
It is relevant to note that since Ishaq Dar’s return and his assuming formal charge of the Ministry, two major decisions have been taken which seem at odds with the agreement signed by the Pakistani authorities with the International Monetary Fund (IMF) under the successfully concluded seventh/eighth reviews in September.
First, not raising the petroleum levy for the ongoing fortnight that led to a decline in the price of petroleum and products, particularly when sales of High Speed Diesel and petrol – the two major petroleum products in use -have significantly slumped because of the quantum increase in their prices that has resulted in a substantial shortfall in revenue from petroleum levy.
The pledge is to raise the levy up to 50 rupees per litre by January 2023 hence this reprieve to the public may be short lived at best – a reprieve that was possible due to a decline in the international price of oil. However OPEC+ countries recently decided to curtail output from November onwards, a decision that the group claimed was based on “uncertainty that surrounds the global economy and the oil market outlooks” which is expected to raise its price internationally.
The finance minister referred to the start of talks on the ninth review with the Fund on 25 October and while time will tell whether he will succeed in convincing the mission not to insist on a rise in the levy that has direct implications on the poor or opt to raise taxes through a mini-budget (which if past precedence is anything to go by will raise existing taxes which are mainly indirect whose incidence on the poor is greater than on the rich) or indeed slash development expenditure with even further negative implications on growth.
Second, the decision to fix electricity tariff at 19.99 rupees per unit for the five export sectors (instead of 9 cents per unit that links it to the rupee-dollar parity), a decision implemented during the Khan administration and continued by the incumbent government till it was realised that there were just not enough funds to continue this subsidy for more than three months of the current year.
Asked how much would this subsidy cost the taxpayers Dar said between 90 to 100 billion rupees which he claimed he had earmarked – a claim reminiscent of Shaukat Tarin’s insistence that funds had been identified for the then Prime Minister Imran Khan’s 28 February relief package, which was never accepted by the Fund, leading to a delay in the seventh/eighth reviews, a delay that incidentally eroded the rupee value against the dollar.
What should be of serious concern to the 75-strong Cabinet is that even the scaled down growth rate would, as per the World Bank report, be predicated on the continuation of the IMF programme.
The finance minister with his team is scheduled to attend the winter IMF/World Bank annual meeting; and he appears optimistic that he will be able to convince the Fund staff to go along with his vision of balancing the books rather than on continuing to insist on the harsh upfront agreed conditions. He is also well aware that his two predecessors failed to convince the Fund and we sincerely hope that he would succeed where his predecessors failed not only because of his past experience as the country’s finance minister but also because of the colossal devastation caused by recent floods that make a compelling case for swaying sentiment in Washington for the fund to relax its obdurate insistence on adherence to the extremely harsh terms of the agreement.
Copyright Business Recorder, 2022
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