August 13th, 2021 – a day before the nation’s 74th Independence Day – a jubilant Governor State Bank of Pakistan, Dr Reza Baqir, hurriedly called a meeting with Islamabad’s economic correspondents corps just an hour before boarding a plane to Karachi. The Governor shared the ‘great news’ that Pakistan’s gross official foreign exchange reserves would for the first time hit the record high figure of $20 billion – beating a 2016 high – and the current account deficit was now sustainable.

By April 2022, Dr Baqir – who is going to complete his three-year term in office on May 4th – in conversations with the Finance Ministry dwellers expressed his worries about rapidly declining foreign exchange reserves that had fallen below the level that was not sufficient to back two-month’s imports.

The central bank’s governor’s apprehensions had some merit since the country’s crucial external economic indicators had worsened and there were serious concerns that if immediate steps were not taken, the rupee-dollar parity could hit a level that was politically unsustainable and push the country into hyperinflation.

The two events also characterise the boom and bust cycles of the economy that has taken the country of 220 million people to the International Monetary Fund’s door for 22 times and there are signs that the troubled ongoing programme would not be the last bailout package, as had been promised by Prime Minister Imran Khan three years ago.

The chances of standing at IMF’s door for the 23rd time are quite high – contrary to the promise made by Imran Khan after signing his government’s first programme with the IMF.

Asad Umar, PTI government’s first Finance Minister – out of four that Khan appointed in his term – said this month that given the current level of foreign exchange reserves and increasing current account deficit, it was difficult to manage Pakistan’s external sector by any government. His statement is a testimony of the poor performance of Imran Khan’s government.

The Pakistan Tehreek-e-Insaf government is leaving behind a mess that is bigger in size and murkier than the one created by the government of the Pakistan Muslim League-Nawaz (PML-N) in 2018. It took about one year to clear the landmines that the PML-N had left behind but the chaos created by the PTI may even take longer before order is restored.

Faced with an uphill task of arranging around $35 billion financing in next fiscal year – that is equal to 310 percent of foreign exchange reserves – Pakistan’s economy is once again standing at a crossroads where the decision makers will be required to pick between populist measures versus saving from the danger of default. The $35 billion is the estimated sum by the IMF that Pakistan would need for fiscal year 2022-23, starting July, to repay its external debt obligations and also bridge the current account deficit gap.

In 2018, when Asad Umar took reign of the Finance Ministry the gross financing needs had been estimated at $20 billion and the gap was in the range of $10 billion that took Pakistan to the IMF door. The recipe that the IMF had prescribed at that time unleashed miseries for the people in the shape of double-digit inflation, high taxes on almost every consumable good and massive increase in fuel and electricity prices, slashing the people’s take home incomes massively.

Yet, the country could not stand on its feet and now is again faced with the challenge of not only restoring and then staying in the IMF programme that is expiring in September but also keep the IMF engaged for yet another programme.

But when the indicators were pointing towards an upcoming storm, Pakistan’s economic policymakers were busy telling fairytales to Prime Minister Imran Khan and making all out attempts to hide facts from the premier, including giving him an impression that the media was unnecessarily negative.

For instance, in his August 13, 2021, presser SBP Governor Reza Baqir, gave five pieces of good news that have now proven incorrect and the central bank had to resort to take emergency measures on this Thursday to bring some semblance to south-bound exchange rate and fast depleting foreign exchange reserves.

Dr Baqir said that gross foreign exchange reserves would peak to its highest-ever level of $19.5 billion and that “the current account deficit should be talked about with happiness” because it is a sign that our economy is growing. Pakistan’s current account deficit and the economic growth were “sustainable” and people should not worry about widening the deficit, said Baqir.

The current account deficit would not increase in a way that would make the economic growth unsustainable, said the governor in August. The current account deficit would be between 2% to 3% of GDP in this fiscal year, which means roughly $6.5 billion to $9.5 billion for this fiscal year, said Baqir. This fiscal year, the economy will grow between 4% to 5%, according to Baqir. When the Governor was speaking highly about the economy, its foundations were already shaken and the external sector façade was crumbling.

The current account deficit had narrowed from 1.5% of GDP in fiscal year 2020 to a 10-year low of 0.6% in the last fiscal year 2021. But according to the Asian Development Bank the 0.6% of the GDP current account deficit was because of a robust 27% rise in remittances that offset a wider deficit in goods and services, savings from deferred interest payments under the Debt Service Suspension Initiative, and lower global interest rates. The current account had already widened to $12 billion and independent experts have expressed apprehensions that it could cross the $19 billion mark of 2018.

Instead of taking measures to reduce the current account at sustainable level, the policy makers opted for the short-term route, which is now haunting them before they could even exit the office. Finance Minister Shaukat Tarin too played his role in the deterioration of economic indicators. He lectured everyone about how he was going to take the country on the path of 6% economic growth and also would force the IMF to accept his terms.

The ADB’s latest forecast is that Pakistan’s economy will grow at a rate of 4% in this fiscal year –down from 5.6% of the last fiscal year. Tarin had to retreat before the IMF that got his terms implemented, including complete autonomy to the central bank.

The central bank governor also sold the Naya Pakistan Certificate – the country’s most expensive short-term debt – to Imran Khan as his government’s achievement and a sign of trust by overseas Pakistanis on the leadership of Khan. Today both the Finance Ministry and SBP are worried that if the overseas investors pull out their nearly $4 billion loans that they gave to the government, what would then happen to the country’s external sector.

The value of the rupee will be the casualty of the high current account deficit, low foreign exchange reserves and deepening political uncertainty. Since the opposition parties introduced the no-confidence motion against Imran Khan, the rupee lost its value by over Rs10.5 to a dollar before recovering Rs3.5 in Friday session.

Now, the central bank has come up with another recipe on Thursday to contain the external sector damages, which experts have termed a knee-jerk reaction. The central bank monetary policy committee made a surprise move and increased the policy rate by 250 basis points to 12.25 percent on Thursday. A month ago SBP left the policy rate unchanged when there was a need to review the borrowing cost after the inflation had hit 13%.

But the central bank argued in its statement that the inflation out-turn in March surprised on the upside, with core inflation in both urban and rural areas also rising significantly. It added that the heightened domestic political uncertainty contributed to 5 percent depreciation in the rupee and a sharp rise in domestic secondary market yields as well as Pakistan’s Eurobond yields and CDS spreads since the last MPC meeting. The central bank’s political expediency in March will now cost heavily to the economy.

The central bank has also introduced 100% cash margin requirements on import of additional 177 goods. About 515 imported goods were already subject to these restrictions but still the current account deficit widened to over $12 billion during July-February period of this fiscal year. It increased the cost of borrowing by 2.5% to 5.5% for export refinancing schemes to slow the demand.

These measures will have adverse impacts on the economic growth rate, squeeze the fiscal space due to increased expenditure on government borrowing and eventually lead to higher taxation and another spiral of inflation in the country.

It is not an ideal time for any political party to come into power, as the decisions that it will take would make the party politically unpopular. Pakistan has gross official foreign exchange reserves of only $11.3 billion as of April 1st, despite the United Arab Emirates (UAE) rolling over $2 billion debt for one year and China also extending the repayment period of its $2 billion loan by another year. Had these payments due in the third week of March been made, Pakistan’s reserves would have fallen to $7 billion and the rupee could have hit the Rs200 to a dollar mark.

The foreign exchange reserves were close to $15 billion till March 18th. The $4 billion or over one-fourth reduction in the reserves within no time has panicked the central bank that is now seeking urgent foreign loans. This has left very little options open for any economic manager to run the system. Anyone sitting at the Q Block – the seat of the Finance Ministry – will have to beg the IMF for a bailout, may also have to go to a friendly nation for more loans too.

In return for extending a helping hand, the IMF could ask the borrower to increase tax rates for the salaried individuals – a demand that is pending and the details suggest that salaried people take home salaries would be reduced by further 30%. The surge in prices of electricity, fuel and cost of borrowing are the usual demands by the IMF every time Pakistan pleads for a bailout.

Dr Miftah Ismail – one of the economic brains of the PML-N – has already stated that the PML-N would like to cut the tax rates for the salaried class. Question is will the IMF allow the party to implement such a policy that will have an annual financial impact of Rs100 billion or the country will risk the IMF relations.

The SBP and the Finance Ministry were discussing options to seek more foreign loans but had very little option in these circumstances. The government had approached a consortium of foreign commercial banks for a $1 billion loan but the banks were demanding high interest rates. However, in the absence of political backing, the bureaucracy was reluctant to get the loan at a higher rate.

The IMF has not yet disbursed $3 billion out of the $6 billion and the revised schedule for completion of the 7th review of the programme lapsed last month. The $3 billion outstanding tranches could be a major incentive for the government to make up with the IMF.

Although China last month agreed to rollover a $4.2 billion loan, the procedural formalities for the $2.2 billion commercial loan still remain incomplete. Pakistan was expecting to receive the $2.2 billion from China this month, once all the procedural formalities were done, which would provide a cushion to the foreign exchange reserves. In case of a delay coupled with higher current account deficit, it could be difficult to manage the situation.

The Chinese assistance has helped the central bank to maintain the gross foreign exchange reserves in double digits but any further delay in receiving the promised money could create problems to manage expectations.

A landmine that has the potential to quickly erode the popularity of the rulers, if exploded, is a decision on reversing the subsidies extended on fuel and electricity by Imran Khan. The government is currently paying about Rs33 per liter subsidy on the sale of the petrol, which is financially unsustainable irrespective of the fact that the petrol price is already Rs150 per liter.

The Oil and Gas Regulatory Authority had recommended fixing the petrol price at Rs205 per liter with effect from April 1st to recover the full cost besides collecting some taxes. Can a government afford to increase the price by Rs30 per liter in these circumstances, is a question that will bother a lot to anyone who now sits in the Q Block.

These measures will stoke inflation, which the central bank said on Thursday would remain above 11% in the short term at least. But it is high time that all the political parties should come closer by bridging their differences and decide on an economic course that in short term may give pain to the people but in longer run would relieve them occasional heavy doses in shape of high taxes, high energy and fuel prices and growing cost of consumable goods.

Given the wide gulf between the PTI and the PML-N – the two parties that are largely responsible for the current mess – it is unlikely that the politicians will agree on a national economic framework, having support of all the parties. The price of political scuffle, which is now coloured with personal enmity between heads of the PTI and PML-N, has been paid by the countrymen since long and there seems no let up in next three to six months.

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