EDITORIAL: The drop in foreign exchange reserves to $7.96 billion, as of 4 November 2022, must be disconcerting for the finance minister whose controversial ‘Darnomics’ was defined by burning SBP’s (State Bank of Pakistan’s) reserves to prop up the rupee.
The market takes very little time to price in such developments, which explains why the rupee turned after a week of gains against the dollar. Ishaq Dar tried to play down the $956 million plunge in one week, which owed to external debt servicing as always, but now he’s got nothing but promises to try to play up market sentiment. The rupee will make gains once SBP receives $500 million from the Asian Infrastructure Investment Bank (AIIB), no doubt, but there’s nothing fundamental to hold it up in the medium term.
There’s not much on the horizon to inspire hope either. The global economy is bracing for a protracted recession, one that is being engineered by rapid interest rate advances in the US (United States) and the EU (European Union) to put a lid on 40-year high inflation, so both export earnings and remittances are expected to tank over the next year or two as well.
Just weeks ago Dar boasted that the rupee would break below the 200-to-the-dollar barrier “within days, not weeks”. Yet here we are, when the PML-N (Pakistan Muslim League-Nawaz) leadership must also be wondering if jetting him from intensive care in London to the finance ministry in Islamabad was worth all the bad optics.
And it’s not as if the going will get any easier. The minister mentioned the few hundred million we’ll get from here and there, and the few billion that some friends will roll over – which are already part of available reserves, so won’t add to them – but that’s not nearly enough to cover the $32 billion or so we must make in debt and interest payments in this fiscal. Another round of imminent currency weakening will also inflate outstanding debt just as inflow is being compromised.
And IMF’s (International Monetary Fund’s) strict structural adjustment will keep fiscal and monetary policy firmly contracted and growth and earnings trapped in a very low band. Now Finance Minister Ishaq Dar will most likely chalk out yet another multi-country trip to borrow more money.
Let’s not forget that even these little reserves comprise predominantly aid and grant money just parked in SBP’s vaults. Very little of it has been earned by Pakistan’s economic machinery. And the little that trickles from the IMF as long as the EFF (Extended Fund Facility) is underway is also in danger of being stopped, all over again, because the finance minister seems to have learned no lessons from his predecessors about adjusting subsidies and taxes for PR and political purposes as much as to get industry moving again.
All this goes to show that Dar’s magic has not worked. And with reserves flashing a red alert, he’s got nothing else to pull out of the bag that will put a floor under markets. Falling reserves, freefalling currency and uncertain markets make for just the kind of toxic combination that deters investors. Since one of the many claims Dar made as he miraculously recovered his health ahead of his return was attracting foreign investors, pretty much all his promises have turned out to be hollow.
It’s the people that suffer because of these experiments, of course, and now the PDM (Pakistan Democratic Movement) government will have even less to sell at the general election that cannot be pushed away forever. But such is the state of the economy that it will be a small wonder if any administration can fix it, especially when IMF’s money comes with such stiff conditions.
Copyright Business Recorder, 2022
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