Towards stability

On August 2, the Election Commission of Pakistan (ECP) ruled: That “PTI was a willing recipient and beneficiary of prohibited funds to the tune of US$2.12 million.” That “PTI continued to hide and conceal facts.” That the “PTI received donations from 351 companies and 34 foreign nationals.” That Imran Khan submitted ‘false affidavits’.

Since August 2, three things have happened: The rupee has strengthened from Rs240 to-a-dollar to Rs210 to-a-dollar; Pakistan’s stock exchange’s KSE-100 index has gone up from 41,000 points to 44,000 points and the yield on five-year Third Pakistan International Sukuk has come down from 50 per cent to 21 per cent.

Question: What does this mean? Answer: The collective investor wisdom, both within and outside Pakistan, believes that the ECP’s ruling of August 2 will be ‘good for business’ because the PTI’s potential for spreading chaos is being arrested. Perhaps, in investors’ view, Pakistan is moving towards political stability – and that will be ‘good for business’. Remember, Imran Khan had said that the dollar will be going up to Rs300.

On the purely economic front: Pakistan has signed the Letter of Intent (LOI) sent by the IMF; the IMF’s $1.17 billion is expected to arrive in the last week of August; Saudi Arabia, according to Bloomberg, is planning to renew $3 billion deposit to Pakistan; the PM has met Japanese investors who are mulling investing $1 billion; Pakistan and Turkey have signed a Preferential Trade Agreement (PTA) and Saudi Arabia is considering transferring its IMF-SDR quota of $2.8 billion to Pakistan.

On the purely economic front, we must, however, make a distinction between ‘good news’ and ‘economic reality’. The economic reality is that the most recent Sensitive Price Index (SPI), comprising 51 essential items, has gone up a painful 37.69 per cent. For the record, pulse masoor up 111 per cent, diesel up 109 per cent, onions up 90 per cent, cooking oil up 73 per cent, mustard oil up 72 per cent and vegetable ghee up 70 per cent.

The other economic reality is that net reserves with the State Bank of Pakistan (SBP) have dropped to a mere $7.8 billion or less than four weeks of import coverage. Yes, there’s plenty of ‘good news’ but on-the-ground Pakistanis are in extreme pain and the SBP is extremely low on foreign exchange reserves.

To the SBP’s credit, it has ‘compressed imports’ and defended the rupee. The real question now is whether the SBP’s ‘intervention’ is sustainable or not. In Pakistan’s case when imports are ‘compressed’ two things happen: our exports also go down (because a lot of our exports depend on the import of material) plus the government’s revenue collection goes down (as 55 per cent of government revenue is collected at the import stage). Clearly, the SBP’s intervention is not sustainable over the medium term.

New loans, as far as the government is concerned, is ‘good news’. But, the reality is that the current debt level is really not sustainable and we urgently need a ‘fiscal consolidation plan’ and a ‘debt reduction plan’. Yes, we cannot do without a privatization plan and a deregulation strategy.

The writer is a columnist based in Islamabad. He tweets @saleemfarrukh and can be reached at: farrukh15@hotmail.com