Karachi, Pakistan- Despite its rapidly shrinking foreign exchange reserves, which will inhibit imports of essential fuel, cooking oil and pulses, Pakistan says it won’t be in dire straits like neighboring Sri Lanka and that you have a “strategy” to increase your reserves.
“There is no possibility of default, none,” Pakistan’s 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 eliminate the government led by Imran Khan, was recently in the US to meet with the International Monetary Fund (IMF) to push for the resumption of the IMF’s $6 billion lending program for the country, a key source of financing that keeps the economy running. The three-year program started in 2019, but this is the third time it has been suspended.
Foreign exchange reserves have fallen to a 28-month low in Pakistan to 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 dealt with crises so close several times in recent years.
“It’s not just two events, it’s happened at least 13 times over the last 50 years,” Atif Mian, an economics professor at Princeton University, said in a statement. a talk earlier this month on Pakistan’s economy which was streamed online.
Pakistan has this chronic balance of payments problem because for years its imports have exceeded its exports, he said.
For example, in the first nine months of the current fiscal year that began in July, Pakistan ran a negative trade deficit in goods and services of $33.28 billion, government data shows. It exported goods and services worth 28.85 billion dollars and imported goods and services worth 62.13 billion dollars. The current account deficit for the period jumped to $13.17 billion, up from $275 million in the same period last year.
The high current account deficit and depleted foreign exchange reserves have pushed up the dollar exchange rate which, at 190 Pakistani rupees per dollar on the open market earlier this month, has hit a new high in the country. Higher dollar rates mean that 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. It 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 products for export. The country’s wealthy, he said, focused on investing and developing real estate that increased their personal wealth, which in turn led to a surge in demand for imported cars and other luxury goods.
“You can’t sell real estate development to people sitting in New York. They are not interested in it. You have to produce something else. Maybe IT services,” Mian said.
Another problem was that many of the money-making sectors, such as sugar cane cultivation and processing, were in the hands of a tiny political elite who 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-driven industries,” she added.
Ashfaq Hassan Khan, Economist and Director of Social Sciences at NUST University, agreed that while the country was facing economic problems, it was not yet serious enough to be called a crisis.
“We have seen the worst level of bookings 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’ve been there, done that, there’s nothing to worry about a sovereign default.”
Finance Minister Ismail acknowledges that relying heavily on imports is a problem.
“Pakistan has an economy that is not export-oriented,” Ismail told Al Jazeera. “So each growth cycle 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 fuel, food and electricity, are fueled by populist programs that provide subsidies, especially around election time, others cater to the wishes of the country’s tiny but powerful elite. In the process, they are creating cheap landmines for the incoming government, experts warn.
“Despite such an acute currency crisis, we are still importing luxury goods such as cheese, chocolates, exotic fruits and vegetables, cars, mobile phones, dog and cat food, etc,” said Dr. Shahida Wizarat, Director of Economics and Research Director. at the Karachi Institute of Business Management.
“We need to stop the importation of these luxury items to create fiscal space for the importation of machinery and industrial raw materials,” he said.
The government is finally taking some steps to remedy that. Islamabad agreed with the IMF to cut fuel and energy subsidies in the coming days and finalize the corporate tax amnesty plan under which taxes in some sectors were reduced or exempted altogether, precursors to a delegation visit from the IMF to Pakistan next month to potentially resume its Extended Fund Facility (EFF) program that has been on hold since June last year, the third time it has been suspended.
The subsequent rise in prices, while helpful to the country’s coffers, is also expected to boost inflation.
Finance Minister Ismail told a private news channel that the country’s new prime minister, Shehbaz Sharif, asked him not to overwhelm ordinary people. To that end, the government will make a policy to raise fuel prices so that rich people with cars do not receive subsidies, while motorcyclists get fuel at cheaper prices, he said.
However, this is easier said than done, as experts believe this separate fuel pricing exercise would be technically impractical.
For now, the country is already facing a power deficit of more than 7,000 megawatts, which has led to power outages across Pakistan lasting six to 10 hours.
“I am well aware of the difficulties people are facing due to cargo loss,” Shehbaz Sharif tweeted on Tuesday. The previous “PTI” government did not purchase any fuel or carry out timely repair and maintenance of the plants. After the emergency steps are decided today, the energy situation will significantly normalize by May 1, insha’Allah.”
Similarly, supplies of liquefied natural gas (LNG) and furnace oil are well below the required amount, adding to electricity shortages. With those prices skyrocketing, the government is reluctant to increase its imports, especially amid dwindling foreign exchange reserves.
To address some of that, the country’s central bank earlier this month imposed 100 percent cash margins, under which importers must deposit in the bank the value of the goods they wish to import, on 177 items, including memory cards. Cash margins, which are expected to depress imports of these items as not all importers have sufficient piles of cash, will hold until December.
Similarly, last year, in an effort to reduce imports in another sector, the central bank placed restrictions on auto financing, as the auto sector imports 50 to 90 percent of components and raw materials. of a car. Reduced loan repayment term from seven years to five years; doubled the minimum down payment to 30 per cent and capped car loans at 3 million rupees ($16,070). But the only thing that slowed was auto financing, according to research analyst Muqeet Naeem of Ismail Iqbal Securities.
For now, all eyes are on the next IMF visit. That, and the news that the The $6 billion program could be increased at $8 billion, it had 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 possible resumption of the IMF program. The index has since fallen.