The PTI government chose to seek an IMF programme in October 2018 since the country's reserves were barely adequate to cover two months of imports. After three and half years when no confidence motion was writing on the wall for government, the country then had only two months of import cover left. To negotiate with the IMF in 2018, there was a functioning administration with a majority and same page tendencies. Today, there is a government who is at a brink of ouster, a fractured IMF programme, and most of those in power, seem to be at odds on how to negotiate a deal. It’s also worth noting that Pakistan will almost certainly need to import wheat. Russia's invasion of Ukraine has pushed up the price of the product, and fertilizer prices have skyrocketed. Its effect can be seen in India where the government's fertilizer subsidy bill will exceed INR 1 lakh crore. Pakistan is also facing a reduction in fuel price subsidies, which will exacerbate the country's already high inflation rate of more than 12%.
SBP calling the right shots
The extreme burnout of a country with import heavy economy is always a high risk. Sri Lanka’s burnt-out economy was due to economic crisis which eventually led to a political chaos; thus ultimately leaving the island out of fuel and at an empty balance. Pakistan’s case is inversely proportional of this. A series of events which led to a political crisis is roping in the economic crisis. A layman example of it is the free float of dollar and continuous depreciation of rupee. Aside from the Supreme Court's ruling on the constitutional and political crises, the State Bank of Pakistan (SBP) made a surprising (but not unexpected) action by raising the policy rate by 250 basis points to 12.25 percent. The decision was made on a day when the Pakistani rupee slipped by Rs3 versus the US dollar intraday to 189, despite widespread speculation that it could reach 200. The announcement came on the same day as weekly SBP reserves dipped underneath the level of $12 billion.
Pressure on rupee
Due to continuous increase in inflation, Imran Khan led government was morally and politically bound to give some relief. Despite rising worldwide oil costs, Pakistan kept its petroleum prices frozen. This has repercussions of its own. There is no demand restraint. As a result, the import bill in dollars is increasing. The rupee is losing ground versus the US dollar. As a result, there were higher subsidies/lost revenues in the rupee, implying that market potential rates are rising. This is evident if we compare per month MS monthly sales per ton.
The longer petroleum and power prices remain fixed, the greater the pressure on the currency and the wider the difference between prescribed and actual prices. If the gap between both is on the higher side, it will be more difficult to close a vicious cycle. The sooner the political crisis comes to an end and there is a sense of calmness in Islamabad, the better for the economy.
As of April 1, 2022, the country's total liquid foreign reserves were $17,476.9 million, the lowest amount since June 2020. SBP reserves fell by $728 million to $11,319.2 million during the week ending April 1, 2022, owing primarily to debt repayment and government payments connected to the settlement of an arbitration judgment related to a mining project. Bank reserves have fallen by $350 million to $6.2 billion. Based on average imports over the last 12 months, the import cover has decreased from 1.82 months to 1.71 months.
GDP per capita
In 2018, Pakistan’s GDP per capita stood at 1482.213 USD as compared to 1188.16 USD. Till 2018, GDP was growing in an exceptional manner, but continued to snail down the graph after 2018. Accelerated inflation afflicted every quintiles and as a result of dropping GDP per capita and rising prices, Pakistan effectively had a stagnant economy with rising costs. It is evident from the GDP per capita (current US$) – Pakistan data.
Similarly, according to the Pakistan Bureau of Statistics (PBS), the country's trade imbalance reached an all-time high of $35.393 billion, up from $20.802 billion during the same period in 2020-21. In the first nine months of the current fiscal year 2021-22, the country's exports climbed by 24.6 percent to $23.298 billion, up from $18.687 billion in the same time in the previous fiscal year 2020-21. Imports climbed by 48.6 percent in the first nine months of the current fiscal year demining in from July to March. They grew to $58.691 billion from $39.489 billion in the previous year's similar period. It is also evident if we analyse the 9MFY trade balance.
What will happen with PTI initiated Roshan Digital Account
RDA is a great deal to attract dollars and for investors too to put in for higher percentages. But, eventually minimum investment which can be done via RDA is a starter from one hundred thousand dollars. Besides having large amount of base capital, there is no proper framework of brokerage unless one have a HNW account with the likes of a JPM or others. This initiative was led by Pakistan Tehreek-e-Insaf. Now with joint opposition has sent Imran Khan Government packing, it is high risk of PRDA funds getting freeze. Investees are queuing up to withdraw their funds.
“Pakistani dollar bond yields are rising,” said Mohammad Sohail, CEO at Topline Securities. “Due to the worldwide sell-off and Pakistan's economic and political challenges, the yield on the 2024 bond is at an all-time high. Bond yields in local currencies are now lower than yields on US Treasury securities.”
Overseas Pakistanis withdrawing their dollars from RDA accounts clearly shows their no trust on joint opposition whose vote of no confidence have ousted the Prime Minister Imran Khan. But they are putting their dollars somewhere else. Due to increase yield on Pak Eurobond, overseas Pakistanis are withdrawing all of their RDA funds and are re-investing them in Pakistan's Eurobonds, which are returning 15% or more. Arbitrage is risk-free, and there is a decreased probability of someone halting Eurobond payments.
Way forward
Subsidising products to estrange political leverage is a bad idea. From economic perspective, Pakistan is a very fragile country. Both the devaluation of rupee at somewhat between 190 to 200 and the rate increase of petroleum products are sane and correct measures. It’s difficult to determine how much adjustment is needed, but we can head in the right direction. We should prepare ourselves for rationalism. This is necessary in the long run. It should have been done much sooner. When the market outperforms you, you should be reactive rather than proactive. The spread between market and policy rates was most likely the widest in the previous 10 to 12 years.
If you want to see what occurs when a civilization is slammed by this perfect storm, go no farther than Sri Lanka, which is currently running out of diesel for power. Or look what happened in Lebanon, where a lengthy political struggle among elites has ruined a thriving society. Pakistan has not yet reached that level. It is vital to note, however, that these problems become increasingly complicated. Tough decisions cannot be made in the absence of a democratic predicament and amid a political crisis. All of this suggests that the problem is just going to get more difficult, unless harsh measures are taken.