By Abdul Wajid Khan

ISLAMABAD, Aug 16 (INP-WealthPK) The Ministry of Finance (MoF) and State Bank of Pakistan (SBP) say Pakistan’s economic problems are temporary and are being forcefully addressed, reports WealthPK.

A joint statement issued by the Ministry of Finance and the State Bank of Pakistan (SBP) on ‘Pakistan’s strategy for navigating FY2023’, says Pakistan’s foreign exchange reserves have fallen since February, as foreign exchange inflows have been outpaced by outflows.

The paucity of inflows has happened in large part due to delay in completing the next review of the IMF program, which has lingered since February due to policy slippages.

Meanwhile, on the outflows side, debt servicing on foreign borrowing has continued, as repayments on these debts have been coming due over this period.

At the same time, the exchange rate has come under significant pressure, especially since mid-June. It has been driven by general US dollar tightening, a rise in the current account deficit (exacerbated by a heavy energy import bill in June), the decline in foreign exchange reserves, and worsening sentiment due to uncertainty about the IMF program and domestic politics.

However, important developments have happened recently that will address both of these temporary issues.

On July 13, the critical milestone of a staff-level agreement on completing the next IMF review was reached. All prior actions for completing the review have been met and the formal Board meeting to disburse the next tranche of $1.2 billion is expected in a couple of weeks.

At the same time, macroeconomic policies — both fiscal policy and monetary policy — have been appropriately tightened to reduce demand-led pressures and rein in the current account deficit.

Finally, the government has clearly announced that it intends to serve out the rest of its term until October 2023 and is ready to implement all the conditions agreed with the Fund over the remaining 12 months of the IMF program.

The statement highlighted that in FY23, Pakistan’s gross financing needs will be more than fully met under the ongoing IMF program. The financing needs stem from a current account deficit (CAD) of around $10 billion and principal repayments on external debt of around $24 billion.

In order to bolster the foreign exchange reserves position, it is important for Pakistan to be slightly overfinanced relative to these needs. As a result, an extra cushion of $4 billion is planned over the next 12 months.

The joint statement said important measures had been taken to contain the current account deficit. To contain the deficit, the policy rate was raised by 800 basis points, the energy subsidy package was reversed, and the FY23 budget targets a consolidation of nearly 2.5 % of GDP, centered on tax increases while protecting the most vulnerable. This will help cool the domestic demand, including for fuel and electricity.

In addition, temporary administrative measures have been taken to contain the import bill, including requiring prior approval before importing automobiles, mobile phones and machinery. These measures will be eased as the current account deficit shrinks in the coming months. 

The joint statement further said these measures were working and the import bill had fallen significantly in July, as energy imports had declined and non-energy imports continued to moderate.

Foreign exchange payments in July were significantly lower than in June. This is true for both oil and non-oil payments. Altogether, payments were sustainable at $6.1 billion in July compared to $7.9 billion in June.

The latest trade data indicates that non-oil imports continue to fall.  Specifically, non-oil imports fell by 5.7 % quarter-on-quarter during Q4 FY22 and are expected to reduce further going forward.

As a result of the prevailing trends, the import bill is likely to shrink going forward and should begin to manifest itself more forcefully in lower foreign exchange payments over the next 1-2 months.

It further highlighted that the rupee had overshot temporarily but it was expected to appreciate in line with the fundamentals over the next few months.

The rupee depreciation since December 2021 could be partially attributed to the global surge in the US dollar, following historic tightening by the Federal Reserve and heightened risk aversion.

The remaining depreciation has been overdone and driven by the sentiment. The rupee has overshot due to concerns about domestic politics and the IMF program. This uncertainty is being resolved, such that the sentiment-driven part of the rupee depreciation will also unwind over the coming period.

Where the market has become disorderly, the State Bank has continued to step in through sales of US dollars to calm the markets and will continue to do so as needed in the future.

Strong steps to counter any speculation have also been taken, including close monitoring and inspections of banks and exchange companies. Further additional measures will be taken as the situation warrants.

Rumors that a particular level of exchange rate has been agreed with the IMF are completely unfounded. The exchange rate is flexible and market-determined, and will remain so, but any disorderly movements are being countered.

Going forward, as the current account deficit is curtailed and sentiment improves, it is expected that the rupee will appreciate.

Credit: Independent News Pakistan-WealthPk