How to steer out of BOP crisis?
The finance ministry said that the exchange value of the rupee was maintained at an artificially high level in the past, which triggered the balance of payments crisis. PHOTO: REUTERS
Pakistan’s economy is once again stuck in a balance of payments (BOP) crisis primarily due to swelling import payments and debt repayments, which demand extraordinary and immediate measures to get rid of the quagmire instead of looking at the IMF for rescue.
The government is engaged in talks with the International Monetary Fund (IMF) for the resumption of $6 billion loan programme and has also approached friendly countries to steer out of the crisis.
However, National University of Sciences and Technology (NUST) Dean and Professor Dr Ashfaque Hasan Khan – who considers the IMF part of the problem rather than a solution – has suggested some out-of-the-box solutions.
“I am least bothered about the IMF (loan programme),” Khan said in a comprehensive talk with The Express Tribune. “Balance of payments is the only challenge facing the economy now.”
The flow of payments has got strained due to the inflated import bill. “Pakistan has continued to increase imports of petroleum products despite a hefty rise in commodity prices,” Khan said while pointing out the factor behind the crisis.
The country’s energy import bill doubled to $14.81 billion in the first nine months (Jul-Mar) of current fiscal year from $7.55 billion in the same period of previous year, according to the Pakistan Bureau of Statistics.
The energy bill grew after the benchmark Brent crude price hit a multi-year high above $130 per barrel following the start of Russia-Ukraine war in late February.
The crude oil price now hovers around $110 per barrel compared to less than $65 more than a year ago in February-March 2021.
Propelled by the swelling imports, the current account deficit spiked to $13.17 billion in the first nine months of FY22 against only $275 million in the same period of last year. These numbers reflect the emerging balance of payments crisis.
According to Khan, there are two immediate and other solutions to the payment problem, of which one is “sticking to the five-day working week”.
Earlier, the new government, immediately after taking over in April, took a populist move by adopting a six-day working week. “This is a highly expensive populist decision,” he remarked.
One can imagine how much it would cost in terms of additional transportation demand and power consumption. Running wagons, buses and cars on roads and air conditioners and computers at workplaces will add up to the already burgeoning petrol cost and electricity bills.
Secondly, according to Khan, the employees should be asked to work from home for one day in the five-day working week.
“You can save petrol and electricity for another day through implementing the work-from-home model. The entire world is doing this and Pakistan has also successfully tested the model during the Covid-19 pandemic. This will help cut the heavy energy import bill to some extent,” the NUST dean said.
Thirdly, the government should discourage all non-essential imports by imposing a prohibitive duty.
“The country which is facing the balance of payments crisis … is importing expensive cars including BMWs in notable quantities. Impose quantity restrictions on such luxury imports to save dollars,” Khan said.
He suggested that imports of above 1,300cc cars should not be allowed and it must also be defined how many cars the country would import in a month and a year and it should not import beyond that.
In Singapore, which a very rich country and has per capita income of $65,000, customers are delivered cars five years after booking. “In comparison, the average per person earning in Pakistan stands at a mere $1,600 but we demand immediate delivery of expensive cars.”
Fourth, Pakistan has continued to import expensive mobile phones in huge quantities in parts form in the name of so-called manufacturing in the country.
“This is untrue. Pakistan does not manufacture cellphones. Instead, we import the phones in the shape of parts and just assemble them in the country,” he said.
“The industry has been given duty relief on imports. Therefore, not only dollars are gone in imports, but the country also loses tax revenue.” He called for suspending imports and assembly for two years.
The country also imports expensive cheese, butter and cosmetics. “Impose prohibitive duties on imports of such items,” Khan said.
Fifth, Pakistan spends $150 million every month as people opt for international travel and shopping. Earlier, such expenses had gone down to $10 million a month during the pandemic but rebounded to $150 million once again.
“Restrictions should be imposed through the levy of 250-300% central excise duty (CED) on airline tickets, except for the visiting expatriate Pakistanis and students,” Khan emphasised.
“Besides, impose 50% charges on spending in foreign currency through credit cards. Such measures (restrictions on international travel) will save around $1 billion a year.”
Pakistan can cut its import bill by around $10 billion a year immediately through discouraging imports of fast-moving, high-value and non-essential goods.
Besides, the current account deficit of over $13 billion includes import of Covid-19 vaccines of over $4 billion in the first nine months of FY22. “It is a must to save lives,” Khan remarked.
He stressed that foreign exchange reserves should be saved to fix the balance of payments problem. “A dollar saved is a dollar earned.” The reduction in imports will ease inflationary pressure in the country.
Khan also proposed some fiscal measures to address the economic woes ahead of the budget presentation.
He suggested that the government should gradually cut the benchmark policy rate to around 7% over the next five to six months from the current 12.25% rate.
“A reduction of one percentage point in the policy rate will reduce interest payments on debt by Rs200 billion a year,” he pointed out.
“What will we save after paying most of the money in interest cost? This is a cause of the surge in budget deficit. We have been stuck in a debt trap. Take measures to come out of the trap.”
Moreover, there is a need to review the Public Sector Development Programme (PSDP). The government should scrap all those development projects for which it has initially allocated only 5-10% funds or even 20%, Khan suggested.
“We have to reduce our throw forward (accumulated cost of projects for a period of more than one year),” he said. “There are around 1,500 projects under the PSDP having a cost of Rs6.3 trillion. The government can reduce the PSDP size by 80% through dropping projects in their initial stages.” Besides, according to Khan, the rupee-dollar exchange rate should be appreciated. “The country has done it successfully in the past. There is no real market-based exchange rate mechanism. Rupee devaluation only multiplies inflation.”
The increase in country’s exports is the result of soaring commodity prices in the world market instead of rupee depreciation.
The writer is a staff correspondent
Published in The Express Tribune, May 9th, 2022.
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