EDITORIAL: All is not well on the economic front, acknowledged Minister of State for Finance and Revenue Aisha Ghous Pasha while briefing the National Assembly standing committee on Finance. She and the Federal Finance Minister Ishaq Dar who has little history of engaging with parliamentary committees or with anyone outside a very small team that he himself carefully selects are on the same page in their insistence that Pakistan will not default.
Given the precarious state of foreign exchange reserves as during the week ended on Dec 16, State Bank of Pakistan’s reserves decreased by $ 584 million to $ 6.116 billion, the situation is very alarming, to say the least. However, to be able to deal with the short- to medium-term foreign exchange needs of the country the exchange rate will have to be more flexible than is the current practice.
At present, the differential between the interbank rate and the open market rate is widening and market surveys indicate that the dollar remains unavailable at even 250 rupees in the open market. There is therefore an urgent need to allow the rupee value to play its due role to stabilise the market through increased home remittances and export proceeds that are withheld at present to maximise the rupee countervalue.
The policy of strengthening the rupee artificially as having any positive economic fallout is less than the negative implications that have beset the economy at present and should be clear by now given the recent downgrade in Pakistan’s credit rating by international rating agencies and its adverse effects on the country’s exports and official remittance inflows.
The government has been using administrative measures to delay the opening of letters of credit for critical imports - raw materials that are negatively impacting on domestic output and employment, deficient perishable food items due to the floods, as well as repatriation of profits by foreign companies that are in turn affecting provision of utilities.
The delay in the start of the ninth review negotiations with the IMF accounts for the delay in the disbursement of pledged assistance by friendly countries, notably China and Saudi Arabia, pledges made directly to the IMF and therefore contingent on the success of the ninth review. To put it in a nutshell, the lack of flexibility in the foreign exchange policy is the root cause of much of what ails the economy today and it is high time that the economic team leaders acknowledge this serious error and reverse this policy immediately.
What should be a source of further concern is that the Federal Board of Revenue’s (FBR’s) projections for the current year would be compromised because the revenue from imports would decline as the country’s imports are controlled because of forex constraints through administrative measures and with heavy reliance on regressive indirect taxes, particularly sales tax, whose incidence on the poor is greater than on the rich, the danger of a possible social unrest is looming large on the horizon.
The government’s heavy reliance on petroleum levy - to the tune of 750 million dollars budgeted under this head for the current year - impacts heavily on the purchasing power of each rupee earned, again with the possibility of public discontent spilling out on the streets.
And perhaps, the unkindest cut of all for the general public with respect to government policy is the fact that irrespective of the fragile state of the economy a trillion rupee increase in expenditure was budgeted in the current year with so far no effort towards curtailment either by keeping public sector incomes constant, implementing reforms of the unsustainable pension system, demanding sacrifices from the key recipients of current expenditure or improving governance in public sector entities, particularly Railways and PIA, reliant on government sovereign guarantees (capped by the IMF) or directly on handouts from the treasury.
Unless corrected, the ongoing economic policies being implemented will exacerbate the problems rather than solve them.
Copyright Business Recorder, 2022