EDITORIAL: The government reduced prices of petroleum and products significantly effective 16 May till the end of the month – a decision that indicates lower international prices as well as an improved rupee-dollar parity though interbank rate fell marginally to have made an impact on prices - from 278.31 rupees to the dollar on 30 April 2024 to 278.26 rupees to the dollar on 15 May 2024.
The reason for noting both factors even though the latter had little, if any, impact on domestic prices is perhaps more political than economic – the government cannot influence the international prices of oil; however, a stronger rupee indicates improved performance, given that the rupee is now market determined instead of artificially manipulated.
In the longest Letter of Intent submitted by Pakistani authorities signed off by the newly-appointed Finance Minister and the Governor State Bank of Pakistan the pledge to ensure “a flexible exchange rate both to support external rebalancing and as a buffer for shocks and resolve to advance policies to promote a deeper foreign exchange market which would help Pakistan attract private inflows on a sustained basis.”
While the objective is salutary, it is yet to be achieved and the Fund cautioned SBP in a footnote in the May 2024 documents on the final review of the Stand-By Arrangement (SBA) that: “the recent stability of the rupee should not lead to renewed expectations that this will persist in future.
In this regard, banks should be free to transact in the interbank foreign exchange market without any constraints, which together with the SBP’s efforts to improve its functioning would help build a deeper foreign exchange market that can serve as a buffer for shocks.“
And in a footnote, it further states that “Staff would welcome greater transparency around SBP’s FX operations, including strengthening ownership and accountability”.
The good news is that Large-Scale Manufacturing sector registered positive in March this year; however, sadly, this was in comparison to March last year when the then Finance Minister Ishaq Dar violated the Fund conditions agreed with his predecessor Miftah Ismail – controlling the rupee-dollar parity artificially that plummeted the reserves to a new low of around 3 billion dollars while constraining around 4 billion dollars worth of remittance inflows through official channels – prompting the Fund to suspend the then ongoing programme.
In comparison to February 2024 the March 2024 figure shows an LSMI decline of 9.35 percent. And overall LSM July-March 2024 grew by negative 0.10 percent when compared to the same period of last year.
There is still a very long road to traverse before the LSM sector will perform at pre-2022 levels, which, in turn, would require major reforms.
Pakistan Stock Exchange (PSX) has been showing a bullish trend for some weeks now, and this too is touted as good news. While PSX does not indicate better quality of life for the general public, particularly the poor and the lower middle classes, as a very small percentage of the total population of Pakistan, like in other countries, is engaged in this activity; yet it does reflect business sentiment, which is a precursor to higher investment inflows – domestic and international.
In Pakistan’s case domestic investment remains hostage to a very high policy rate of 22 percent, inexplicable as core inflation is calculated at 13.1 percent for April (a rise from the March estimate of 12.8 percent) and there must be stakeholder concern that until and unless there is a feel good factor for the bulk of the population, a possibility of spontaneous street protests on the same pattern as those witnessed in AJK recently lurks.
Those sceptics who unfairly argue that the recent decrease in POL products’ prices may be attributed to such concerns must accept that the government has already maxed out the petroleum levy, at 60 rupees per litre, and is all set to achieve the budgeted total levy collection of 869 billion rupees; hence there is no need to meet the Federal Board of Revenue’s shortfall by raising the levy further, which in any case may require legislation.
There is evidence that the global markets are looking at Pakistan more benignly as the SBA programme is completed and negotiations on a new one are currently ongoing.
Yet, given the economy’s fragility it is not a short-term or even a medium-term task but a long trek requiring implementing sustained politically challenging decisions that one would assume would be an integral component of the budget 2024-25 proposals.
Copyright Business Recorder, 2024
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