A time bomb ; Experts say SBP measures are too limited and too late

Pakistan Heading Into A Severe Balance Of Payments Crisis Amid Alarming $ 20 Billion Trade Gap And Growing Current Account Deficit Of $ 7 Billion In First Five Months Of Current Fiscal Year .

The higher than expected foreign currency payments created instability in the value of the rupee and higher inflation, making the lives of the general public miserable.

“The current situation of the external balance of payments shows that a crisis awaits us. The trade deficit stands at $ 20 billion, or 15% of GDP, ”Miftah Ismail, top PML-N leader and former finance minister, told Bol News.

Pakistan’s trade deficit reached $ 20.65 billion in the first five months (July-November) of fiscal year 2021/22. This is mainly due to the increase in the import bill which soared to $ 33 billion during the same period.

Likewise, the current account deficit swelled to $ 7.1 billion in the first five months of the current fiscal year, compared to a surplus of $ 1.87 billion in the corresponding period last fiscal year. .

Over the past three years, the PTI government has taken credit for lowering twin deficits without improving other indicators. But now these deficits expose the structural weaknesses of the Pakistani economy, which the government has failed to correct.

“These problems were there even during the time of our government, but we kept the cogs of the economy moving, which resulted in continued growth in GDP,” Ismail said.

He; however, said that despite the fragile economic conditions, Pakistan will not face any defaults. “But the country is going in the wrong direction.”

Pakistan’s exports jumped 27 percent to $ 12.36 billion in the first five months of the current fiscal year, from $ 9.74 billion in the corresponding months of the previous fiscal year. However, these numbers are not sufficient to fuel import payment requirements.

“Export receipts are needed to make payment for foreign payments. Right now the import / export ratio has fallen to 37 percent from 45 percent under our government, ”Ismail said.

The country’s import bill has increased significantly in the current fiscal year, increasing at the rate of $ 6.6 billion per month. That means the country needs $ 79.2 billion to meet import needs by the end of the current fiscal year.

The import bill for November 2021 rose sharply to $ 7.9 billion, an 85% growth, from $ 4.29 billion in the same period last year.

Considering the current trend of payments, Pakistan has an import coverage of 2.3 months, which is lower than the international standard of three months. The official foreign exchange reserves of the State Bank of Pakistan (SBP) stood at $ 18.57 billion in the week ending December 10, 2021. This also includes $ 3 billion placed by the Saudi Fund for development (SFD) with the central bank.

This Saudi support is a ceremonial deposit, placed at 4.0% for one year. Excluding this amount, the import coverage is 1.97 months.

The reduction in import coverage has resulted in a massive depreciation of the local currency, which has fallen 13% against the dollar since the start of the current fiscal year. Currently, it is hovering at its all-time low of around Rs178.15 against the dollar on the interbank market on December 22, 2021.

The increase in payment for overseas purchases can be attributed to the ease in the event of the coronavirus pandemic and the recovery of the domestic economy; massive rise in international oil prices; and a surge in commodity prices in international markets also contributed to the increase in the import bill.

Last but not least, the volatile situation in Afghanistan; after the United States froze Kabul’s foreign exchange reserves as the Taliban took power, a factor of financial instability also remains.

Khurram Schehzad, CEO of Alpha Beta Core, a venture investment firm, said currency smuggling to neighboring countries remains a major problem. “The uninterrupted exit of the Pakistani rupee has created instability in the exchange rate. “

“The currency in circulation has climbed to 40%, which is much higher than in other economies,” Schehzad said, adding that the money was not only in the hands of Pakistanis, but also in the hands of Pakistanis. Afghans and Afghans. others.

Since Afghanistan’s foreign exchange accounts have been frozen and the neighboring country needs imported goods for its national needs, a large number of exports have been made by the Pakistanis.

Pakistani importers buy foreign goods in dollars and smuggle them into Afghanistan for transactions in rupees, the CEO of Alpha Beta Core explained.

In recent weeks, the SBP has taken steps to reduce dollar outflows and reduce domestic demand in order to stop inflation and support the local currency. But experts say these steps are too few and were taken too late.

The SBP’s measures include placing limits on foreign currency purchases by individuals on the open market; policy rate hikes of 150 basis points and 100 basis points to 9.75%, respectively, over a short period of time; modification of the instructions for exchange companies under which exchange companies are now required to obtain identification documents such as CNIC for transactions over $ 500; and reduce the retention period to three days by foreign exchange companies for foreign receipts, including exports and remittances.

In addition, the SBP decided to impose a 100 percent cash margin requirement (CMR) on the import of 114 items, bringing the total number of items subject to a cash margin to 525; and the review of prudential regulation of consumer finance.

The measure was taken to moderate the growth of demand in the economy, resulting in slower import growth and; thus, supporting the balance of payments position.

The changes to prudential regulations effectively prohibit the financing of imported vehicles and strengthen regulatory requirements for financing domestically manufactured / assembled vehicles with a cylinder capacity greater than 1,000 cc and other consumer finance facilities such as than personal loans and credit cards. But all of these measures failed with the free fall of the rupee.

Former Chairman of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) and Chairman of the Businessmen Panel (BMP) Anjum Nisar said: “The SBP should take tough action to discourage imports of luxury goods and encourage domestic manufacturing.

The higher import bill and the free float of the local currency led to inflationary pressures. The central bank itself admitted that inflation rose more sharply than expected.

In the last two monetary policy announcements, the SBP increased the discount rate by 250 basis points to 9.75%. The business community believes that higher interest rates would increase the cost of doing business and make domestic products uncompetitive, leading to increased imports in the near future.

Raising the key rate would be counterproductive for the industry, he said, adding: “It will increase the cost of doing business and domestic manufacturers will lose competitiveness.”

These measures would shut down industries and favor imported products in the local market, he added. “Rising costs at the national level would help other regional markets. “

“The interest rate is 4.0 to 5.0 percent in regional economies including India, Bangladesh and China,” he said, adding that their goods would arrive in Pakistan.

“The government must take immediate action to reduce the trade deficit. There should be a complete ban on the importation of luxury and non-essential items for a period of time.

Containing inflation will be a gigantic task for the government. However, timely decisions can give some breathing space in the future.

Historically, Pakistan was known as an agrarian economy. The country has five main crops, including cotton, sugar cane, rice, maize and wheat. Unfortunately, the crop situation has deteriorated over the years and now the country even imports sugar and wheat.

The food import bill increased by 54% to reach $ 8.34 billion in fiscal year 2020-2021, compared to $ 5.42 billion in the previous fiscal year. A better agricultural policy can help reduce the food import bill.

In 1959, the country obtained its first industrial policy. As a result of this, a massive shift was observed towards industrialization. But over the years, the industry has seen tough times, especially with power shortages, deteriorating law and order, and corruption.

Many industrial units have moved abroad and those that have remained in the country are still struggling.

Pakistan’s import bill climbed to $ 56.4 billion in fiscal year 2020-2021, from $ 44.55 billion in the previous fiscal year, an increase of 26.60 percent. The surge in the import bill is even stronger in the first five months of the current fiscal year.

Controversial SBP governor Dr Reza Baqir, at his first press conference in June 2018 after taking over as head of his office, made it clear that the central bank would let market forces decide the exchange rate.

However, it was also assured that the central bank would intervene in the event of volatility. Since the SBP governor’s press conference, the rupee has lost about 47% of its value. The rupee was at Rs121.39 against the dollar on June 14, 2018.

Major market players and leading economists blame the SBP for the sharp depreciation of the Pakistani currency, as it failed to take any action to prevent the rupee from plummeting under the International Monetary Fund program.

Experts say the government must take action to stop unnecessary imports and encourage locally produced consumable items. The local market is inundated with imported goods, which include all end products that can be produced locally. At the same time, measures must be taken to stabilize the currency market and create an environment conducive to investment and business.