The fast paced dollarisation of the economy has started taking place because of roaring speculations being made in the wake of the revealing JIT report, while the issue is turning serious due to the “inaction” of the ministry of finance and central bank.
Currency dealers and importers are largely indulging in speculations spearheading hasty imports, which is further putting pressure on rupee. Concerned officials concede for the first time that people are frantically buying dollars and opening their foreign currency accounts expecting further devaluation of rupee. The month of June witnessed $550 million increase in foreign currency deposits which is said to be a peak seen in the past 10 years.
The more worrying issue, according to an insider, is the unrestrained government borrowing, which especially included $400 to $500 million from the foreign currency deposits of the citizens, being maintained by the commercial banks. These deposits are being used for import financing to avoid further depleting of the forex reserves.
The accumulative import financing which was $885 million in March and April went as high as $1,320 million only in the month of May registering an increase of $435 million.
This trend is being termed as “very grave” and reminds of 90s when the then PPP government used $10 billion, out of $11 billion forex reserves for import financing. But this time around, the current government is using the dollars of private foreign account holders for import financing reportedly with the connivance of the commercial banks.
Some officials of the finance ministry and State Bank of Pakistan (SBP) have raised their voices and said the Pakistani currency is being controlled artificially. “I don’t know why is there speculation on dollar, which had appreciated in inter-bank and not in the open market,” a former senior official of the finance ministry said.
He said speculation was being allowed by officials concerned of the ministry and SBP, which was not possible without a “motive”. The abrupt 3.1 percent appreciation of dollar in the inter-bank was the main reason that prompted speculations. It had indirectly hit home remittances which declined by $500 billion in June this year. It was a 25 percent decrease as Pakistani workers reportedly diverted their hard earned money into dollar deposits or preferred to send them through hundi and hawala. Overall there has been 11 percent reduction in home remittances which was the biggest since August last year.
Now that a new chief has been appointed at the central bank, insiders maintain that he is a trusted man of the finance minister, who would hardly differ with the finance ministry on any issue. Once again the SBP would become the finance ministry’s “monitoring wing” and would especially avoid preparing “balanced and independent” reports. Often the ministry bosses disapproved these reports, but couldn’t do anything as the tenure of the governor is a secured position not moved instantly.
For now, the government has reverted the downward slide of rupee; it is yet to be seen if it would be able to maintain it for the next six months or beyond. The situation is getting difficult each passing day due to decrease in reserves, chiefly on the back of falling foreign inflows.
Market players, businessmen, and exporters say the rupee is overvalued and must be depreciated gradually if not swiftly. The IMF says the currency is 23 percent overvalued, while officials maintain has to be adjusted and readjusted as per preferences and economic fundamentals. It maintains that an abrupt fall of rupee is not beneficial as it increases the debt burden. The 3.1 percent depreciation has already caused an increase of Rs250 billion in debts, though some improvement had been made subsequently when government intervened in the absence of a full time SBP governor.
The political fiasco connected to the prime minister and his family has further jolted the economy, including Rs550 billion fresh losses of investors in the stock market. The extent of damage to the struggling economy will depend on how quickly the Panama issue is resolved.
There is an increasing consensus in both the official and unofficial quarters that prolonging the Panama leaks scandal for another 15 months will further damage the already poor economy.
The KSE-100 index has already taken a plunge of 1,000 points and the faint-hearted investors are clueless about the future direction due to the indecisiveness of the government on the economic front. The trade deficit has already widened by 37 percent to $32.6 billion, while imports surged to an all-time high level of $53 billion. The current account deficit went as high as $10.6 billion and home remittances dropped by close to $800 million failing to achieve its $20 billion target set for the last financial year. The balance of payment position is now projected to further worsen and the inept officials of the ministry of finance and the central bank seem busy elsewhere.
All major economic indicators failed to perform during 2016-17 including twin deficits, revenue, imports and exports, foreign exchange reserves, home remittances, inflation, large scale manufacturing, employment, and poverty alleviation.
The political stakes of the prime minister and the ruling party are at stake, the dark clouds hovering over the economy is equally a serious issue that has to be taken into considered by all individuals and institutions.
The new analysis of Moody’s Investors Services, New York-based international rating agency, has affirmed Pakistan’s B3 issuer and senior unsecured ratings and maintained a stable outlook. It believes the country’s medium term growth outlook is strong due to China-Pakistan Economic Corridor (CPEC), and the continuing effects of macro-stability-enhancing reforms started under the IMF’s three year Extended Fund Facility (EFF) in 2013-14.
It praises CPEC by calling it “strong” but then warns that the government’s debt burden is high and fiscal deficits remain relatively wide. The report also identifies that despite being stronger compared to some previous years, the foreign fund adequacy is still vulnerable to any significant increase in imports. Moody’s report interestingly also mentioned domestic politics, along with geopolitical risks as “constraints on rating”.
Like IMF, Moody’s officials talk about six percent GDP growth with ifs and buts, and say that real growth will come when CPEC-related development projects materialise. Why can’t IFIs particularly IMF and Moody’s categorical state the facts about the Pakistani economy which they often concede faces serious problems? They say it in a tricky way; first giving the impression that all is well, and then narrating a different picture. That is why independent economists accuse the IFIs of hiding facts and not firmly asking the government to implement structural reforms without which the economy will never take off.
Way forward, the rulers and the planners will have to concentrate on the economy instead of protecting their own political and vested interests. The Supreme Court decision will determine the future political course of the country and it is to be seen how the economy is looked after that.
The writer is a senior journalist based in Islamabad