Is default in prospect?

The economy is closing in external payment ‘implied default’ situation. This means that with SBP’s (State Bank of Pakistan’s) forex reserves depleted, authorities may forcefully cut down imports further. SBP’s reserves as of now (to be published on Thursday) are likely to be below $7 billion. At such a critical juncture, the finance minister is publicly claiming that he does not care about the IMF (International Monetary Fund); he’s certainly playing with fire, to say the least.

Dollars have dried up in the interbank and open markets. Without the IMF, there is no recourse that may allow us to stay afloat. And the finance minister is living in his own fantasy world. The story started with political uncertainty after VoNC (vote of no-confidence), and there has been no stopping it since.

The optimal response of course would have been if the outgoing PTI (Pakistan Tehrik-e-Insaf) government had not frozen fuel prices, but the post-VoNC lingering by Shehbaz-led government did not help things either. Now it’s incumbent finance minister’s turn. The government should have reduced the working week and taken other measures way back in summers; but the first call by the PM was to increase the working week to 6 days and prepone import of petroleum and LNG at peaking prices.

SBP had no choice but to respond. It began with the then finance minister Miftah Ismail placing quotas on certain imports. That successfully resulted in lowering the imports. But due to this, both exports (due to shortage of raw material) and remittances (due to conversion of imports to informal channel) fell as well, which partially diluted the impact on the current account deficit decline.

Nonetheless, the current account deficit is now subdued significantly; but the financial account situation is now reaching alarmingly dangerous levels as external loan repayments are increasing, without injection of fresh loans. Now, with SBP forex reserves under $7 billion, SBP has informally instructed commercial banks to lower the import quota of each bank (barring defence and petroleum group) by another 35-40 percent. This would lead to further disruption in the supply chain.

Concurrently, ironic developments are taking place. One element is abolition of the regulatory duty (RD) on EVs from 100 percent to zero. That has made expensive EVs affordable for the superrich club. RD on EVs has been slashed (earlier than other cars) under the pressure of a few parliamentarians. All they care about is their fashion statement of driving e-tron and likes. Expect 100s of EV imports in 1 to 2 months.

On the other hand, SBP is placing restrictions on direct carrier billing (DCB) due to procedural lapses. Everyone knew about the loophole in these procedures, but still the system was working just fine. Overnight, SBP realized that the regulations must be enforced in both letter and spirit. DCB payments are used against digital purchases by those who usually don’t have credit or debit cards, through their mobile network credit/balance. Reportedly, this payment was no more than $34 million, probably much less than the amount spent on EVs’ purchases in a month. Go figure.

Then another issue is of soybean imports stuck at port. The shipment is being cleared and the payment has been made. Still $300-500 million worth of soyabean is stuck. It is not cleared on the premise of being GMO which is not allowed in Pakistan. Going by law, that is correct. But for the past many years, the same GMO soyabean was being imported without certification. The supply chains have been developed and it is critical in preparation of meals for livestock – both chicken and cows. Without this being cleared, expect shortages (and inflation) in chicken and milk in the coming months.

This is sad and ironic. On one hand, SBP is putting restrictions on imports to save falling forex reserves, at the cost of a slowdown in the economy, shortages of goods, and job losses. On the other hand, government functionaries have overnight realized the health hazards of GMOs to further exacerbate the shortages.

Nothing makes sense. There are multiple supply chain distortions. Engineering sectors are operating at half the quota. There are issues with imports of raw materials and availability of spare parts for exporters. Export proceeds are falling.

It’s not just because of the global slowdown. For example, Bangladesh’s textile exports are increasing as the country is replacing China’s exports to the West. However, in Pakistan working capital is short and inputs are expensive. This is even though there has been massive expansion in the textile industry in the last 2-3 years. But factories are still shutting down.

Reaching out to the IMF could not be more urgent. Yet, the attitude of the finance minister has sent shockwaves through financial markets. Everyone (who can) is hoarding dollars. As a result, reserves are falling. The new restriction of 35-40 percent import quota might not be enough. Reportedly, the finance ministry is issuing approval for any defence-related imports. Next in line is petroleum.

If the SBP forex reserves fall below $6 billion, expect rationing in the petroleum imports as well. Already, counterparty banks are demanding confirmation of LCs. The charges which used to be 1-2 percent are now as high as 7-8 percent. Some banks are not entertaining Pakistan’s LCs at all. Others have imposed reduced limits.

There is adverse implication if the petroleum products run short. There would be long lines at petrol stations and the supply will have to be rationed. There would be longer hours of electricity load shedding with no fuel for standby generators. There would be shortages of medicines, food, and other essentials.

The situation could not be much different from what Sri Lanka had been facing in the past few months. However, it increasingly appears that Pakistan may not strictly default on its international debt obligations. That is why Dar’s behavior towards the IMF is callous. And the attitude of a few parliamentarians is oblivious to the ground realities.

Dar and others still have the audacity to play politics. Rome is burning. The political leadership needs to wake up and think beyond its political capital. It needs to impose fiscal consolidation to bring the IMF back. It must increase gas prices and stop dolling out funds to MNAs. It needs to shorten the working days per week and reduce working hours per day to save on power and fuel. Otherwise, the ruling coalition will run out of whatever political capital it is left with.

Copyright Business Recorder, 2022