The government is in the throes of an acute dollar and rupee shortage (attributable to lack of fiscal space) accounting for severe administrative and exchange measures to check imports as well as not disbursing authorised development expenditure to meet its budgeted current expenditure. The question that is increasingly being asked is what is the way forward in the short and medium term to increase foreign exchange inflows as well as domestic revenue.
In the very short term, defined as the remaining six months of the current year, there is an emergent need to release the stranglehold on the interbank forex rate, a stranglehold reflected by the rupee’s rising divergence from the quoted open market rate as well as the operational open market rate at which dollars are actually available; and revert to the market-based or managed float agreed with the International Monetary Fund (IMF) under the ongoing programme. A market-based rate is not an independent float with supply and demand determining the value of the currency as is done in developed economies but as per the IMF the exchange rate is determined by the apex bank (State Bank of Pakistan) based on its assessment of relevant macroeconomic indicators, including the balance of payments, foreign exchange reserves, prevailing disorderly market conditions. This measure may well raise remittance inflows which plummeted from 2.459 billion dollars in November 2021 to 2.108 billion dollars in November this year – a fall of 14 percent.
Additionally, it is relevant to note that while the widening differential between the interbank and open market rates is not in dispute, yet the SBP website provides the October 2022 revised figure of the real effective exchange rate at 100.18 and the provisional rate for November at 98.8. The footnote inserted during Pakistan Tehreek-e-Insaf (PTI) government’s tenure remains in place notably that exchange rate misalignment requires a sophisticated analysis taking account of factors such as demographics, external and fiscal sustainability, and some other macroeconomic fundamentals. Disturbingly to date almost three years after this footnote was first inserted the SBP’s research department has yet to assess the extent of exchange rate misalignment.
While on the fiscal side there are credible reports of a mini-budget to raise revenue yet, perhaps sadly not surprisingly, this is to be achieved as per past practice: through increasing existing taxes and given that the bulk of tax revenue is from indirect regressive taxes whose incidence on the poor is greater than on the rich, the pressure will be on the common man; tariffs, particularly on gas and electricity, are expected to rise significantly as part of the IMF condition to achieve full cost recovery rather than to focus on dealing with sectoral inefficiencies. These two by now traditional avenues for the government where the buck is passed onto the common man is a decision that may have severe socio-economic implications attributable to a 24.5 percent Consumer Price Index, 33 million flood affectees and last but not least, lower output due to administrative and exchange restrictions that are negatively impacting on raw material imports and therefore on unemployment levels.
The onus therefore cannot remain on this traditional anti-general public source for meeting Fund’s conditionalities as this is no longer sustainable. One would assume that the very first action to begin negotiations on the ninth review would be the reversal of some recent policy decisions, including the 110 billion rupee unfunded electricity subsidy to exporters and the farm package that too is unfunded and heavily reliant on commercial banks lending to farmers without collateral, regarded as a financially unviable prospect for any bank anywhere in the world.
To increase leverage with the Fund the government would be well advised to slash the 8.6 trillion rupee budgeted current expenditure for the year against 7 trillion rupees budgeted last year, an option that appears to not be in consideration. The question is, which budgeted item can be slashed in the short term? Interest payments cannot be slashed for fear of default in the short term or indeed even in the medium term till a policy decision is taken and implemented to limit borrowing from multilaterals (other than at concessional terms), commercial borrowing and debt equity through issuance of sukuk/Eurobonds. Moody’s Investors Service downgraded Pakistan on 6 October 2022 that effectively makes borrowing on the global financial market too expensive for Pakistan, thereby leaving multilaterals/bilaterals as the only source of borrowing. While this explains Finance Minister Dar’s constant reference to pledges by friendly countries and the likelihood of their imminent disbursement yet those pledges are contingent on the success of the IMF’s ninth review. It is, therefore, critical for the government to restructure loans with the Paris Club and other creditors notwithstanding the rhetoric to the contrary.
Pension reforms identified by many an administration must be implemented though this would take at least a year or two but one would assume that their implementation would provide some leverage with the Fund.
Subsidies of 699 billion rupees were budgeted for 2022-23 and one would hope that all subsidies are streamlined and targeted through the Benazir Income Support Programme (BISP), which has been separately budgeted 340 billion rupees. The single largest contributor to the budgeted subsidy is the power sector at 490 billion rupees and here too one would hope for targeted subsidies and a revisit/renegotiation of IPP contracts as a first step, on the same lines as the agreements reached with IPPs (Independent Power Producers) other than those set up under the umbrella of the China Pakistan Economic Corridor (CPEC) by the Khan administration, to be followed later by revisiting the inter-Disco tariff differential earmarked 225 billion rupees in the current year. All non-essential procurements must be frozen by civilian and military personnel for the rest of the fiscal year though not included are the operational costs of the ongoing operation against terrorists. The government must tighten its own belt rather than continuing its previous policy of burdening the people through further indirect taxation that would devastate the lower to middle income earners, given the appalling state of the economy and menacingly high inflation.
