No time to bargain

If we were to pick a single metric to gauge the state of the country’s economy, it would be the performance of the rupee versus the dollar. Finance Minister Dar no doubt recognizes this, which explains the emphasis he has laid on the value of the local currency unit ever since he returned to helm the Ministry of Finance. Unfortunately, however, the strategy seems to have fallen flat even when measured against the chosen touchstone. In fact, the disproportionate emphasis on the value of the rupee could be doing more harm than good by progressively driving foreign currency remittances into the grey market as the price differential between the interbank and open markets increases. The root cause of the rupee’s slide is Pakistan’s chronic inability to earn forex proportionate to its hard-currency spending needs. It is also well known that, for decades now, our choice strategy to bridge the gap has been to borrow, which is why our economy has become dependent on debt inflows just to keep going. This is precisely why the markets know we are in trouble when an inflow does not materialize on schedule. And the markets know that a $1.18 billion tranche of funding from the IMF is held up over differences of opinion over how to approach the ninth review of the $7 billion Extended Fund Facility (EFF) that had only just gotten back on the rails before Dar stepped in. The question is: can we really blame the markets for being jittery when our forex reserves have dwindled to as low as $6.7 billion – especially when we know that most of this amount is tied up in deposits by Saudi Arabia, the UAE, and China?

As would be expected, Prime Minister Shehbaz Sharif and his team are on the lookout for fresh debt inflows from our traditional bilateral lenders like Saudi Arabia. Time, however, is of the essence in this, and it does not look like the government is about to beat the clock. Worried about running out of time (or forex) by the time a cash injection is secured, the government is doing all it can to hold on to what little of hard currency it has left. However, administrative measures like banning repatriation of foreign currency profits by foreign companies and imposing ceilings on importers’ letters of credit rub the markets the wrong way. A parallel effort to bust suspected forex smuggling rings siphoning hard currency abroad is likewise proving counterproductive, because it gives away the government’s desperation for hard currency. In particular, Afghanistan has always more or less piggy-backed on Pakistan’s economy and this has never been a cause of concern for the authorities under normal circumstances. Such actions are enough to negate any assertions of things being hunky-dory. No, we are not in default as of now, but there is little doubt we are headed in that direction, barring a major hard currency inflow in short order – inflows that have to be sustained over a period of time.

As things stand, the only strategy to realize and sustain those inflows is to mend fences with the IMF. The finance minister knows this which is why all the foot-dragging over the ninth review beggars comprehension. Pakistan has repeatedly reiterated resolve to complete the IMF programme, but then there has been implied talk by the finance minister that the country can go on without the Fund’s help. It is not clear anymore if we are trying to drive a hard bargain or dithering over a difficult decision point. It does not help that the government is bereft of any wriggle room to drive a bargain. The upshot is that the markets have started to view Pakistan’s relationship with the Fund as troubled if not outrightly broken. This is a dangerous situation, and the responsibility to set it right forthwith rests squarely with the government.

The likely sticking point over the review seems to be Pakistan’s promise to turn out a small primary surplus at the end of the current fiscal, which the IMF staff do not see materializing unless the government finds fresh revenue streams. Dar is understandably leery of further burdening an already struggling populace, especially as this is an election year. But allowing the economy to slide for months with the EFF tranche held up can turn out to be even more expensive, both economically and politically, than imposing new taxes. The better alternative, therefore, would be to take charge of the situation – and now. The economy has gone as far as it could in coasting mode. Now is the time to give it the gas and steer it in the right direction. The government must get its act together, with or without a mini budget. The alternative is too awful even to contemplate.