Minister for Finance Muhammad Aurangzeb since he took oath ten days less than six months on 12 March 2024 has repeatedly claimed that stabilisation has been achieved, and that his primary objective going forward is to implement pro-growth policies that would fuel employment opportunities and improve the quality of life of the general public.
The quality of life has been on a downward trajectory for all income groups but particularly the salaried and the vulnerable (poverty levels are a high of 41 percent) which raises questions about this claim that was incidentally also repeatedly made by Aurangzeb’s predecessors – be they selected by the party leader, or a stakeholder consensus appointee (inclusive of caretakers).
It is therefore imperative to determine how our finance ministers define stability – a definition that has to be seen within the context of a country seeking International Monetary Fund (IMF) Board approval, a prerequisite for disbursement, of the 7 billion dollars Extended Fund Facility (EFF) programme, the twenty-fifth in the country’s 77-year history, though the staff level agreement (SLA) was reached on 12 July 2024.
Stability is defined as an improvement in the current account deficit reflective of an improved balance of payment position of which a key component is the foreign exchange reserves held by the State Bank (to cover at least three months of imports).
Reserves plummeted to a dangerously low level of 2916.7 million dollars on 3 February 2023 attributable to the then finance minister’s economically flawed policies to control the rupee-dollar parity without the foreign exchange reserves required to intervene in the market, leading to multiple exchange rates that rendered all official banking transactions in foreign currency economically unviable.
Reserves rose to 8727.2 million dollars on 14 July 2023 - two days after IMF Board approval of the 3 billion dollars Stand-By Arrangement (SBA), a programme loan on which the SLA was reached on 30 June 2023.
Fourteen and a half months later, on 14 August 2024, reserves were only around 564.6 million dollars higher than in July 2023 – at 9291.8 million dollars – an amount that has not exceeded 9423.7 million dollars (12 July 2024) since May this year. Or, in other words, data suggests that reserves have not risen significantly since July last year.
Reserves have not strengthened appreciably after the successful completion of the SBA early May this year and one may assume that the reserves would be strengthened subsequent to the Board approval of the EFF, a prerequisite for disbursement. Be that as it may, the question is whether improvement in reserves can be sourced to the two desired forms of foreign exchange earnings notably remittances and higher exports, or are debt based. Three observations are in order.
First; remittance inflows plummeted in 2022-23 by 4 billion dollars compared to the year before due to the prevalence of multiple currency rates; however, with the abandonment of that flawed policy, a precondition for the SBA agreement, remittances began to rise. In June this year inflows registered a healthy 3158 million dollars, however, in July remittances declined marginally to 2995.2 million dollars.
Therefore, the data suggests that Aurangzeb, as chair of the Economic Coordination Committee of the Cabinet, approved two incentive schemes this Thursday: (i) reimbursement of telegraphic transfer charges, and (ii) incentive scheme for foreign exchange companies if they surrender 100 percent of foreign currency to the apex bank in the interbank market at a flat or variable rate – flat rate proposed increase from one to two rupees per US dollar and variable rate up to three rupees per dollar against incremental remittances up to 5 percent or 25 million dollars (whichever is lower) and four rupees per dollar against incremental remittances above 5 percent. Time will tell if these incentives are successful.
Second; trade deficit has also been contained; however, imports were allowed by the government to rise from 3691 million dollars in July 2023 to 4278 million dollars in July 2024 - an increase of 15.9 percent. The objective was to ensure that imports of raw materials are not curtailed which were negatively impacting on domestic output, growth, exports and employment opportunities.
However, this increase had a marginal impact on raising exports in real terms – from 2064 million dollars in July last year to 2307 million dollars in July this year, or an unimpressive total of 243 million dollars (though an impressive rise of 11.77 percent) while imports declined by 587 million dollars or by more than double the rise in exports during the same period.
It is therefore critical for the government to look at out of the box ways to increase exports and not simply do what it has done in the past – provide fiscal and monetary incentives to existing exporters which are not supported by the IMF. In the country’s 77-year-long history exports constitute output that is surplus to domestic demand with all administrations to-date extending incentives to promote exports of the surplus. It is time that the country uses its severely limited fiscal space wisely and extends incentives to only those units that are dedicated to exports.
The World Bank’s report titled October 2021 Pakistan Development Update: Reviving Exports came up with some advantageous policy recommendations that include: (i) gradually reducing effective rates of protection through a long-term tariff rationalization strategy to encourage exports, (ii) reallocate export financing away from working capital and into capacity expansion through the Long-Term Financing Facility; (iii) consolidate market intelligence services by supporting new exporters and evaluating the impact of current interventions to increase their effectiveness; and (iv) design and implement a long-term strategy to upgrade productivity of firms that fosters competition, innovation and maximizes export potential.
And finally, it is evident that the rise in reserves is mainly debt based which is why the IMF’s EFF, currently pending at the Board, is so critical to Pakistan’s ability to meet its debt obligations this year as without the Fund approval friendly countries will not disburse pledged assistance as the country’s administrations have learnt since 2019.
External receipts budgeted in the current year are 5,685,801 million rupees (with the exchange rate projected in the budget at 278 rupees to the dollars giving a total dollar figure of 19.3 billion dollars) with Jameel Ahmed, the State Bank of Pakistan Governor, recently informing the Standing Committee on Finance that Pakistan’s external debt repayments were 26.4 billion dollars this year, including 16.4 billion dollar roll-overs of cash deposit and foreign commercial loans (from China estimated at 3.9 billion dollars). He added 1.4 billion dollars had been paid in July 2024, however foreign exchange reserve position in July does not reflect an outflow of this amount: 5 July 2024 reserves were at 9291.8 million dollars declining to 9102.2 million dollars on 26 July 2024, indicating rollover by a friendly country.
Ahmed then proceeded to give an interview to a foreign news agency in which he claimed that Pakistan intends to raise up to 4 billion dollars from Middle Eastern commercial banks (while it is not yet clear whether the recent upgrade by Fitch and Moody’s, contingent on the country meeting its prior EFF conditions, will make the interest on offer by commercial banks affordable – a fact that deterred the caretaker finance minister from borrowing though she did not mention the rate on offer that was too high. Be that as it may, the rate on offer is likely to be a lot higher than the rate on offer by the friendly countries and multilaterals which will up the debt servicing charge, putting more pressure on our foreign exchange reserves.
Stability is therefore not defined in terms of the general public’s access to standard resources, including affordable physical (electricity, gas etc.) and social infrastructure (health facilities, access to education) and housing. And hence, the disconnect between the government’s claims of achieving stabilisation with the general public remaining largely unimpressed if not downright critical.
To argue that there was no other solution is simply untenable as the government could and should have at least not budgeted a raise in current expenditure of 21 percent against the revised estimates of last year and thereby reduced the need for borrowing (externally and domestically) that would have had a salutary effect on domestic inflation (with no need to manipulate data) and increased leverage with the donors in favour of consumers by getting agreement on a more phased reform agenda.
Copyright Business Recorder, 2024
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