Karachi, Pakistan – Despite its rapidly dwindling foreign exchange reserves, which will hamper imports of essential fuel, cooking oil and pulses, Pakistan says it will not be in dire straits like neighboring Sri Lanka and has a “strategy” to increase its reserves.
“No chance of default, none,” Pakistani Finance Minister Miftah Ismail said in an interview with Al Jazeera. “Yes, we have a strategy to increase our reserves and you will see that they will start to increase.”
Ismail, a member of the PML-N who successfully led a vote to impeach the government led by Imran Khan, was recently in the United States to meet with the International Monetary Fund (IMF) to push for the resumption of the 6 billion dollars from the IMF to the country. , an essential source of financing that keeps the economy going. The three-year program was launched in 2019 but this is the third time it has been suspended.
Foreign exchange reserves fell to a 28-month low in Pakistan at less than $11 billion, barely enough to cover imports for the next two months. The last time foreign exchange reserves were below this level was in December 2019.
But economists are not too alarmed as the country has faced such close crises on several occasions in recent years.
“It’s not just two events, it’s happened at least 13 times over the past 50 years,” Atif Mian, a professor of economics at Princeton University, said in a statement. a conference earlier this month on the economy of Pakistan which was posted online.
Pakistan has this chronic balance of payments problem because for years its imports exceeded its exports, he said.
For example, in the first nine months of the current fiscal year which started in July, Pakistan ran up a negative goods and services trade deficit of $33.28 billion, according to government data. It exported goods and services worth $28.85 billion and imported goods and services worth $62.13 billion. The current account deficit for the period jumped to $13.17 billion from $275 million in the same period last year.
The high current account deficit and depleted foreign exchange reserves pushed up the dollar rate which, at 190 Pakistani rupees to the dollar on the open market at the start of the month, hit a new high in the country. Higher dollar rates mean the country has to pay more for the same amount of imports.
“Unsustainable growth model”
“India and Bangladesh don’t have to go to the IMF like we have to repeatedly. This is because Pakistan has a fundamentally unsustainable growth model,” Mian said.
One of the main reasons for this is the lack of local companies manufacturing goods for export. The country’s wealthy, he said, are focusing on investment and real estate development, which has boosted their personal wealth, in turn leading to increased demand for imported cars and other luxury items.
“You can’t sell real estate development to people sitting in New York. They don’t care. Something else needs to be produced. Maybe IT services,” Mian said.
Another problem was that many cash-generating sectors, such as the cultivation and processing of sugar cane, were in the hands of a tiny political elite that had made the business “remarkably unproductive”, Mian said. “China and South Korea also have the problem of elite capture (of lucrative businesses), but they have it in export-oriented industries,” he added.
Ashfaq Hassan Khan, economist and director of social sciences at NUST University, agreed that while the country was indeed facing economic problems, it was not yet severe enough to qualify as a crisis.
“We have seen the worst level of reserves to cover just two weeks of imports in the past,” Khan said. “In November 1998, we had international sanctions and our reserves fell below 400 million dollars. I went there, it’s done, there is nothing to fear from a sovereign default.
Finance Minister Ismail acknowledges that being heavily dependent on imports is a problem.
“Pakistan has an economy that is not export-oriented,” Ismail told Al Jazeera. “And so every cycle of growth leads to an increase in imports, but exports don’t increase much, resulting in a shortage of foreign exchange that forces a cycle of boom and bust.”
While some of these imports, including for fuel, food and electricity, are spurred by populist programs that hand out handouts, especially around election time, others cater to the desires of the country’s tiny but powerful elite. . In the process, they are creating economic landmines for the new government, experts warn.
“Despite such an acute currency crisis, we continue to import luxury goods such as cheese, chocolates, exotic fruits and vegetables, cars, mobile phones, dog and cat food, etc.”, said Dr Shahida Wizarat, Head of Economics and Director of Research. at the Institute of Business Management in Karachi.
“We need to stop importing these luxury items to create fiscal space for importing machinery and industrial raw materials,” she said.
Roll back subsidies
The government is finally taking action to fix it. Islamabad has agreed with the IMF to reduce fuel and electricity subsidies in the coming days and conclude the corporate tax amnesty program under which certain sectors have had their taxes reduced or completely exempted, precursors to the visit of an IMF delegation to Pakistan next month to potentially resume its Extended Financing Facility (EFF) program which has been suspended since June last year, the third time it has been suspended.
The subsequent price increase, while helpful for the country’s coffers, should also push up inflation.
Finance Minister Ismail told a private news channel that the country’s new prime minister, Shehbaz Sharif, had asked him not to burden ordinary people. To this end, the government will put in place a policy to raise fuel prices so that the wealthy with cars would not receive subsidies while motorcyclists would get fuel at cheaper rates, he said. he declares.
This, however, is easier said than done, as experts believe this separate fuel pricing exercise would be technically unfeasible.
For now, the country is already facing a power deficit of more than 7,000 megawatts, which has led to power outages across Pakistan that last six to 10 hours.
“I am fully aware of the difficulties people are facing due to load shedding,” Shehbaz Sharif tweeted on Tuesday. The former “PTI government did not purchase fuel or undertake timely repair and maintenance of factories. After emergency measures were decided today, the electrical situation will normalize significantly by May 1, insha’Allah.
Likewise, supplies of liquefied natural gas (LNG) and heating oil are well below the required quantity, which is exacerbating electricity shortages. With these prices soaring, the government is reluctant to increase imports, especially amid dwindling foreign exchange reserves.
To address some of these issues, the country’s central bank earlier this month imposed 100% cash margins – under which importers must deposit with the bank the value of goods they wish to import – on 177 items, including flashcards. Cash margins, which are expected to drive down imports of these items because not all importers have enough cash, will remain in place until December.
Similarly, last year, in an effort to reduce imports into another sector, the central bank imposed restrictions on auto financing, as the auto sector imports between 50 and 90 percent of components and raw materials from a car. It reduced the loan repayment period from seven years to five years; doubled the minimum down payment to 30% and capped car loans at 3 million rupees ($16,070). But the only thing that slowed down was auto financing, according to research analyst Muqeet Naeem at Ismail Iqbal Securities.
For now, all eyes are on the IMF’s next visit. That, and the news that the $6 billion program could be increased to $8 billion, have investors cheering.
The KSE-100, which includes the country’s 100 largest listed companies, rose 520 points to more than 46,000 points on Monday, a day after the finance minister announced the potential resumption of the IMF program. The index has since fallen.