By Ghulam Haider
Pakistan’s economic turmoil stoked by International Monetary Fund’s loan trance and nosediving rupee has hit a new low as the shortage of US dollars is making it extremely difficult for local banks to make international payments in foreign currency.
Amid the ongoing currency fluctuations in cash-strapped Pakistan, a black market for dollars has sprung up in the country after the State Bank of Pakistan (SBP) restricted access to foreign currency to preserve depleting reserves — which plunged to a four-year low of $6.7 billion.
Pakistan’s finance minister Ishaq Dar admitted that the country is facing a massive shortage of US dollars amid “market abuses” of foreign currency within Pakistan. “There’s no doubt that the global economic environment in the wake of the Covid pandemic and the Ukraine war has exacerbated Pakistan’s economic woes, which has also added to dollar liquidity crunch.”
About 9th review of the International Monetary Fund (IMF) programme, Dar said that “The IMF has asked for more information to complete the ninth review. It was “unusual” because Islamabad had met all the requirements already. The IMF wanted Pakistan to explain as to how the country will fund the cost for the reconstruction and rehabilitation of the devastating flood, which this summer was estimated to have insured over $30 billion in losses. The government is fully committed to complete the IMF programme.”
Pakistan has been struggling to pay salaries to staff of some of its missions abroad, citing “fiscal crunch” and “shortage of dollars”. Similar situation has been prevailing in various government departments where the employees have been awaiting salaries due to shortage of finances. Reportedly, up to four months of dues were left unpaid to Pakistan’s missions abroad, which were eventually released on December 14.
With the IMF’s ninth review pending since September, Pakistan has desperately been scrambling to secure financing to meet external payment obligations for the current financial year. Ahead of the review, Pakistan has been trying to approach allies to seek financial support, and Dar had said that he would expect to get $3 billion from a friendly country.
Years of propaganda have given Pakistanis an unrealistic understanding of what ails their country. As the economy crumbles, the economic crisis may be even more immediate. The alternative would be to again default on foreign loans, an oft-repeated pattern that has made Pakistan one of the world’s most bailed-out countries since its formation in 1947.
There will always be someone there to make sure there is no default, whether it is China, Saudi Arabia, one of the banks, the US. And that just further entrenches the denial of the political class that they have to take responsibility.
Everything is always someone else’s fault in the land of the pure. The urban elite don’t have to bear the brunt of rising prices for food. They don’t travel in their own country to see how most of the people live. They can go abroad as they like.
Public anger at political mismanagement could translate into a radicalized religious response—for instance, if Khan harnesses public anger for a political return. That would just take the country further backwards. And no one wants or needs that
Skyrocketing inflation
Pakistan is in a political and economic death spiral that could push it over the same cliff as Sri Lanka, as internal conflict, regional instability and global uncertainty all pose imminent threats.
The country faces life-threatening challenges similar to what Sri Lanka faced before the island government collapsed amid 50 percent inflation, food, fuel, and medicine shortages, power cuts, and, in May, its first failure to make an interest payment on a foreign loan.
For Pakistan, life support is a drip feed of loans from foreign friends and emergency injections from multilateral lenders. Some of Pakistan’s economic woes are internal and even self-inflicted, with subsidies thrown around like confetti, for instance, as successive governments have failed to boost exports that would benefit the working class to balance high-end imports for the military and political elite.
Other causes are external. Russia’s invasion of Ukraine has strained global food supplies, leading to an uptick in prices while also choking off the supply of energy such as natural gas and oil.
Pakistan’s outstanding sovereign debt obligations over the next five years will be just shy of $50 billion, coming at a time of widespread poverty, hunger, and public ire.
Inflation in Pakistan is running above 38 percent annually, sovereign debt now exceeds $250 billion. Pakistan’s Current Account recorded a deficit of 2.3bn in Sep 2022, according to data published by State Bank of Pakistan. Pakistan’s total payable till June on account of external account was $21 billion of multilateral. The trade deficit is projected at $12 billion. The country would have to be required to mobilize external resources, roughly about, $31-33 billion.
Pakistan’s economy is facing a balance of payment crisis. The central bank reserves have fallen to $6.7 billion – barely enough for a month of imports. The fiscal deficit has already touched 1 per cent of the GDP in first quarter of current financial year against 0.7 per cent of the GDP agreed with the IMF.
Emergence of grey market
While the money-changing firms claim they have no dollars despite current exchange rates on display outside their businesses, it is learnt that customers can still buy the greenback on the black market at a rate about 10 percent higher than the one offered in the regular one.
The emergence of a parallel market and the forex shortage have added to the long list of woes for Pakistan — which is already dealing with the repercussions of the devastations caused by cataclysmic floods, economic uncertainty and political turbulence.
The year 2022 was not a roller-coaster ride for Pakistan with floods affecting over 33 million people and causing damage worth over $38 billion. The incumbent coalition government is faced several challenges on political front, and is still struggling to pay the debt, with the rupee being one of the worst performers globally this year.
The SBP has restricted overseas payments and slashed the amount of foreign currency that a person can carry overseas to $5,000 as an immediate action to manage the fast-depleting forex reserves, and this policy is resulting in the picking up of grey economy.
Last month, Google stopped payments through its Play Store after witnessing a delay in payments for in-app purchases. The local units of carmakers Honda Motor and Toyota Motor had multiple weeks-long shutdowns this year because they’ve been unable to import parts.
Forex Association Pakistan President Malik Bostan cites two other reasons for dollar crunch, which are increased spending on overseas trips after the pandemic and increased demand for currency in Afghanistan after the Taliban’s takeover last year.
To make matters worse, the remittances sent by overseas Pakistanis dropped in October to the lowest in eight months while migrant workers are using the grey market because it offers a better exchange rate. Resultantly, businesses are unable to get transactions cleared by the central bank have also turned to this grey market.
Containers await clearance
Hundreds of thousands of the drug manufacturing, industry raw material, food and perishable items containers have been held up at ports in Karachi as transactions are not being cleared by banks because of the foreign currency shortage.
The phenomenon brings Pakistan to the emerging markets list that have parallel exchange rates including Argentina, Lebanon and Nigeria, which indeed is a very bad sign for the country. While a 10 percent premium isn’t particularly large, the emergence of the market could wrest control of foreign exchange away from the usual authorities and have a negative impact on foreign investment and the business environment.
The access to dollars is clearly tight, impacting importers and remittances through official channels. Although the currency has lost more than a fifth of its value against the greenback this year, the dollar premium in the illegal market may also signal more weakness going forward for the country’s rupee.
The inordinate delays in opening of Letter of Credit (LCs) mainly due to a dollar crisis in banks country may lead to worse situation. The importers are unable to open LCs due to lack of dollar and are finding it extremely difficult to import goods from different destinations abroad. The food supplies and production activities are badly suffering due to delay in opening of LCs.
Besides badly affecting the import of raw materials for various industries, the ongoing liquidity crunch is taking its toll on fruits and vegetables as hundreds of containers carrying perishable food items remained stuck at Karachi port owing to “non-availability of foreign exchange as per commercial banks”.
Pakistan Fruit and Vegetable Exporters (PFVE) has claimed that the commercial banks are not clearing the documents of the shipments justifying the lack of foreign exchange. They say that if the imported commodities do not reach the markets, their prices will increase further in the wake of a fresh wave of dearness.
The development comes as Pakistan faces a growing liquidity crunch with foreign exchange reserves continuing to fall.
Soybean’s acute shortage
The crisis triggered by soybean’s acute shortage in the market is daily causing a national loss of 2 million to 3 million chicks while pushing up prices of poultry products across the country, representatives of Pakistan Poultry Association (PPA) say.
The soybean containers are stuck at Port Qasim for weeks. The ill-advised step is causing a loss of birds, animals and businesses across the country as well as forcing citizens to buy poultry products at higher rates.
Soybean, largely imported from the US and Brazil, is the only source of protein for commercial farm birds and constituted 40 per cent of their meal. This vegetable-based protein source is safe and helps the bird grow fast and no alternative protein source is available in the market. From 2 million to 3 million chicks are being dumped daily as feed is unavailable to raise them.
Pakistan looking towards KSA
Pakistan is likely secure a multibillion-dollar financial support package from long-time ally Saudi Arabia this month as the country’s ninth review of a $7 billion IMF bailout ran into snags. Islamabad is seeking Saudi Arabia’s financial assistance alongside the passage of $1.18bn in IMF loans.
The Saudi Arabia’s package would include deposits boosting the country’s foreign reserves and oil on deferred payments and talks with Saudi Arabia are expected to happen soon.
“We are expecting that we will, God willing, get financial support from Saudi Arabia, most likely this month,” a finance ministry official said, adding it would be around a $4 billion package. “Some of that package will go to our reserves and the rest is oil and some other commodities on deferred payments.” “We hope that we will soon conclude talks, which we have started with Saudi Arabia,” he said.
Pakistan’s economy is facing a balance of payment crisis, with central bank reserves having fallen to $6.7 billion — hardly enough for a month of imports — and the current account deficit having widened.
With the IMF’s ninth review delayed, Pakistan needs external financing on an urgent basis.
Arrears deepen
Technically, Pakistan has not defaulted on its debt because it hasn’t missed — or even delayed — any payment to its creditors. Yet it certainly has fallen into ‘arrears’. Last week, the global International Air Transport Association complained that Pakistan was second among the top five markets that have restricted or stopped foreign airlines from repatriating their ticket sales revenues of nearly $225 million to their home countries. So, technically, we haven’t defaulted but simply fallen into arrears.
The country’s central bank is struggling to protect its liquid foreign currency reserves, which were reported to have sunk to the four-year low of $6.7 billion on December 2 following the payment of $1bn Sukuk bonds.
The foreign companies their shareholders are finding it difficult to repatriate their dividends or profits. This is happening on top of the administrative actions by the State Bank of Pakistan to restrict imports to prevent the existing foreign exchange stocks from disappearing.
Tenure insecurity means no government takes the tough decisions to fix the economic mess. Lavish wasteful subsidies are showered to keep voters happy — the fuel subsidies given by the previous government and the delay in the increase of domestic gas prices by the incumbent ruling alliance are two recent examples of this fiscal profligacy.
Years of excessive spending without poor tax collection has created an inefficient and uncompetitive economy ridden with huge debt we don’t have the means to pay back unless others lend us more money to keep us afloat.
In the past, we would get easy bailouts from the international community. Now the world is reluctant to risk its money unless we prove to them that we are ready to own our mess and put our house in order. This is quite obvious from the difficulties the government faces in getting the promised cash from the multilateral, bilateral and commercial creditors.
Political compulsions mean that the government is not educating the public about the true state of economic health. No measure has been implemented for energy conservation or reduced consumption. The supermarkets continue to showcase imported items that we can easily do without purchasing.
There is no easy way out of the current economic mess. We will have to pursue a low-growth path for many years to avoid the recurrence of a similar crisis. That will be very painful for the people and have profound social consequences. But the consequences of not following that path will be more painful.
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