1 .Worthy audience faced with an unprecedented external crisis over diminishing foreign exchange reserves and drying dollar inflows, as well as a weakening fiscal position, the government has failed to contain inflation and domestic demand, despite severelygamaginging imports of raw materials & other goods .The default risk won’t vanish even after the December bonds are paid off. Recently the State Bank’s?after maintaining the status quo in its last two monetary policy committee meetings in August and October 2022 ,has now taken the market by surprise, the?decision to hike its key policy by 100 basic points?to a 24-year high of 16% .It is very disturbing step in the risk mitigation challenge, which seems intended to appease the IMF.Indeed, the Stste Bank of pakistan has taken the market by surprise; few expected it to boost the borrowing cost, especially with Ishaq Dar, an advocate of so-called low interest rates and a stronger home currency, heading the finance ministry drastically wrong .How devastatingly the failure of Ishaq Dar lies/ errors /false claims could aggravate the looming or lurching threat of default are quite evident:-
- Historically worst depreciated rupee has further weakened, barring aside the substantially growing of current account deficits.
- SB negative interest rates are a major reason for soaring prices and a weakening rupee; according to the MPC (marginal propensit) to consume, global and domestic supply shocks,which are raising costs amid the economic slowdown, are spilling over into broader prices and wages, driving cost-push inflation.
- The hike in borrowing costs would not only raise inflation, currently led by verynegative real interest rates, but also be nerve wracking for the borrowers and growers besides sending a strong signal to the government to change its reckless fiscal course and control its spending,which will not happen what comes may in this imported regime?
- This is an alarming situation since both the ministry and State Bank must be coming to heel after the IMF twice?negated the discussion over its ninth programme performance review, delaying the disbursement of its next loan tranche of over $1bn because of Pakistan’s reluctance to implement the reforms agreed on.
- Even though the SBP governor hinted at halting the rate hike, the revised inflation forecast of 21pc-23pc for the present fiscal year, because of stronger than ever anticipated inflationary pressures, shows the bank is still behind the progression curve.
- Conversely, monetary tightening alone cannot contain inflation that has devastated millions of households over the last few years.The fiscal authorities must play their part as the SBP has stressed in its monetary policy statement by “maintaining fiscal discipline … to complement monetary tightening, which would together help prevent an entrenchment of inflation and lower external vulnerabilities”
- Point to ponder is in case the finance ministry keeps responding to the bank’s counsel. With crucial foreign inflows drying up in the wake of IMF review delays, chances are the bank’s move may not ward off further deterioration in the balance-of-payments position.
- If fiscal slippages continue ,the SBP would be well advised to hike the rates more aggressively to ensure the ministry falls in line.There’s no other option left now.
2. Ladies & Gentlemen the reliable opinion makers and experts of economic matters think that the basic problem with Pakistan’s economy has always been the current account deficit, meaning that we have always had less to sell to foreigners than our inclination to consume their products.The boom-and-bust cycle of our economy is precisely because we run into a current account deficit every time we try to achieve growth. Moreover our ruthlessly corrupt leadership with primitive mindset and lack of political will,particularly is not innovative in erasing our fiscal policy errors; as we may ?see below even our mistakes are recycled openly /blindly :-
- When the new PPP government came, it had to devalue the rupee and run to the IMF .Although there wasn’t much that was stellar about its governance except for the Benazir Income Support Programme ,the PPP should get the credit that it increased exports to 13.5 pc of GDP.
- After NRO the PML-N Govt. focused on building few energy but large transport infrastructure and ushering in CPEC Project, our exports declined from a devastating 38 pc to only 8.5 pc of GDP and we ran the second-largest current account deficit in our history. Again, the issue was a currency pegged to a dollar that highly subsidized imports and made them surge even as our exports were getting priced out.
- Miftah Ismail strongly criticized Imported Govt fiscal failure saying to make amends in the five months he worked as Shahid Khaqan Abbasi’s finance minister through devaluation but the solution lay in the IMF, which could only happen after a new government was formed post-elections. In the event, the incoming PTI government hesitated for a while before?accepting to opt for a new IMF programme.
- With the advent of the coronavirus pandemic, which the PTI government handled quite well, IMF conditionalities were lifted even as loans kept coming.This allowed it to spend borrowed money without raising tax revenues. Such a push for some unsustainable growth turbo-charged our imports and with export-to-GDP remaining almost stagnant we ran into the third-largest current account deficit in our history.
- Miftah opines, when the imported government came, we did what we had to do to renew the IMF programme and avoided default. This obviously involved some hard choices and I was relentlessly criticized from all sides.The main criticisms were about our letting the markets decide the rupee-dollar parity, resulting in huge increasing in the fuel price and raising taxes.
- Miftah criticizes the Imported Govt saying that we would’ve been happy if the dollar had organically depreciated, but I wasn’t in favour of either, spending money or issuing administrative sanctions to keep the dollar at a certain rate. I don’t know what the optimal rate of the dollar is; I think only the market can determine that.
- Surely the ugliest priority of the finance minister to make imports cheaper and export harder, is unfortunately what an appreciated rupee does.We, on the other hand, like to promote imports and restrict exports and remittances by keeping the rupee overvalued and then complain when we run out of dollars.
- Today, there is a large and persistent difference between the open market and the interbank exchange rates. The large difference is detrimental to our exports and remittances and is encouraging imports.The other criticisms are increasing the price of fuel,lifting subsidies & imposing more & more sales taxe ,tariff , IT/,GST and property taxes in near future.Moreover, biggest tragedy is tax evasion if there are 2.2 million shops in Pakistan and only 30,000 pay income tax, is it not fair to ask them to pay just Rs.3,000 per month?
- Today, our default risk has climbed up again and reached dangerous levels. This risk won’t vanish even after the December bonds are paid off. At the risk of sounding an alarm, I have to say that we have no room left for error. Concrete measures that reassure markets and lenders are urgently needed.
- There comes a time when the national interest must prevail over political interest. This is that time.This government will have no right to criticize PTI or anyone else if, having eagerly decided to come in power, it is unable to do what is right for the country.
