The numbers are not reassuring. Inflation hit a 14-year high in July, reaching 24.9 per cent, versus 8.4 per cent in July 2021. Troubling as these numbers are, an even more troubling development is unfolding. The government is in a scramble to rescue state-owned Pakistan State Oil (PSO) from default on its external obligations. Rescuing PSO was obligatory on several counts. To start with, the state-owned behemoth is the backbone of the nation’s energy supply chain, and a disrupted supply chain is the last thing we need right now. Then there is the factoid that the government of Pakistan is the guarantor of PSO’s foreign obligations. The situation of our forex reserves being what it is, the treasury has absolutely no wriggle room in that area. Clearing the outstanding fuel bills of government entities is the right approach to helping PSO through this liquidity bottleneck. But funding this intervention calls for additional revenue to match this expenditure to keep budget numbers on track, which is necessary to keep the deal with the IMF intact – hence the need for a mini-budget. How to structure that minibudget is no doubt a thorny question but there are reasons to hope Finance Minister Miftah Ismail will come up with an answer. One sign is his move to walk back a fixed tax small traders were queasy about. He certainly thinks there are safer ways to recoup the lost revenue – and to raise the additional revenue required to fund the PSO bailout – without risking shutdowns or protests.
Then there is the political risk. COAS Gen Bajwa’s telephone diplomacy last week must have cut the US’s political risk perception of Pakistan by at least half. In another political dispensation, it would be seen through the 'same page' lens. In the current circumstances, it signals the military backing the policy approach, which means a lot given our history. In any case, the joint statement by the Ministry of Finance and the SBP is a good move that should have a calming effect on the markets. The finance minister's assertion that the rupee is undervalued and its depreciation is driven chiefly by sentiment holds water, as does his attempt to quell rumours that a particular level of the exchange rate has been agreed with the IMF. This also shows the value of building trust with the markets. The markets appeared to have factored policy slippages into their risk calculus when they stubbornly declined to respond to the staff-level agreement in July, deferring their judgement until the executive board’s nod. The finance minister has earned their trust over the last few months by being a man of his word and particularly by standing firm on budget targets, declining any unbudgeted subsidies and insisting on raising additional revenue to meet additional expenditures. He seems to have saved his goodwill for the last stretch, and when he finally did put in a word, the markets endorsed his position when the rupee rebounded against the dollar, closing the day at Rs238.84 to a dollar. The impact on the open market was even more pronounced, with the greenback trading around Rs241.
In these circumstances, news that Pakistan has executed the last ‘prior action’ to earn the revival of a stalled IMF bailout means we may finally be moving into the bend if not already turning the corner. Nevertheless, the diesel fuel price hike it brought is likely to further boost inflation at a time when people are already struggling to make both ends meet. It is not hard to imagine how impressed a person who cannot feed their family would be by the finance minister’s pep talk. Dr Ismail has also been signalling he is very aware of how much havoc his policies are wreaking where the rubber meets the road. But he argues that those policies are the bitter pill that must be swallowed to avert default. He earned further wrath of the middle class recently by proclaiming he is focussed solely on averting the default, to the exclusion of growth and development; and that he can do nothing about inflation. It is time the finance minister took a strong position against inflation and started caring about inflation, growth, and development once again. Hopefully, that time is nigh, with only about three weeks to go before the IMF executive board meeting. The revival of the Extended Fund Facility (EFF) should then allow Pakistan access to international financial markets and pacify domestic markets once more. His detractors may then be thankful for Dr Miftah Ismail’s steady hand at the tiller at this trying hour.