The federal government has linked the payments for defence imports with permission of the finance ministry due to deterioration in the external sector amid a constant fall in exports and foreign exchange reserves.
Sources said that the Ministry of Finance had revised its guidelines for the military budget in light of the depleting foreign exchange reserves. They added that it would be mandatory to seek the permission of the finance ministry’s external finance wing before opening a letter of credit (LC) for imports against the regular defence budget.
The sanctioning authority for import payments against the Armed Force Development Programme already rests with the finance ministry. The new guidelines will apply to the opening of fresh LCs and carryover LCs, sources revealed.
Secretary Defence Lt Gen (R) Hamooduz Zaman Khan met with Finance Minister Ishaq Dar to discuss these budgetary constraints.
“Defence and economic issues together with security related budgetary matters were discussed during the meeting,” noted the ministry of finance on Thursday.
The finance minister highlighted the economic outlook and fiscal position of the country and various measures taken by the federal government to stabilise the economy and said that the results of these measures will soon be reflected in the strengthened fiscal position and enhanced economic activities.
The defence secretary raised the issue of hurdles in clearing the LCs and opening of new ones, according to the officials.
The Ministry of Finance did not respond to the request for comments on the issue of curtailing powers to open new LCs for imports.
The disclosure about new guidelines came amid fresh data released by the State Bank of Pakistan (SBP) and the Pakistan Bureau of Statistics (PBS), showing a decline in foreign exchange reserves and export proceeds during the current fiscal year.
The trend of the reserves and the non-debt creating inflows are discouraging but in line with the prevailing negative market sentiments about the external sector outlook of the economy.
Sources stated that the central bank has again recommended severe curtailment of non-essential imports as the government’s decision to lift ban on certain imports in return for higher duties has backfired and has put additional pressure on the SBP.
According to government sources, the permission for making payments for defence imports will now be given by the Ministry of Finance, keeping in view the foreign exchange reserves situation.
Earlier, the military budget wing had the authority to authorise the opening of an LC for imports against the regular annual defence budget. These powers have now been given to the external finance wing of the Ministry of Finance.
During the week ended on November 25 2022, the SBP’s reserves further decreased by $327 million to just $7.5 billion due to external debt repayment, according to the SBP.
Meanwhile, the PBS released the trade statistics for July-November period, which do not indicate any improvement in the foreign exchange reserves even in coming months due to the constant fall in exports. “Still, Pakistan has managed to cut its trade deficit by $6.2 billion, or over 30%, by blocking imports during the first five months of the current fiscal year. The trade deficit shrank to $14.4 billion in the first five months of the current fiscal year, solely on the back of a steep fall in imports,” said the PBS.
Exporters kept on disappointing despite getting Rs145 billion in electricity subsidies in this fiscal year alone. According to the PBS, exports stood at $11.9 billion, down $430 million, or 3.5%, during July-November period of this fiscal year.
The annual export target of nearly $38 billion has become irrelevant due to the poor performance. There is no accountability for the hundreds of billions of rupees given in annual subsidies to exporters.
“Imports amounted to $26.3 billion during the July-November period, down $6.6 billion, or 20.2%,” the report stated.
The reduction in imports has been achieved by erecting non-tariff barriers like the central bank permission for the import of plant, machinery, equipment and vehicles and other imports. This will, however, hurt the prospects of economic growth.
The SBP is examining almost every letter of credit, has introduced import quotas and even restricted imports through open accounts.
According to the IMF, Pakistan needs at least $34 billion for external debt servicing and bridging the current account deficit during the current fiscal year.
On a month-on-month basis, exports contracted 0.7% to $2.36 billion in November 2022 over the preceding month, a dip of $15 million. Imports stood at $5.2 billion with an increase of 11.3%, or $534 million, over the preceding month. The monthly trade deficit widened to $2.9 billion, or nearly one-fourth.
For the current fiscal year 2022-23, the government has set the trade deficit target at $27.8 billion, which requires a reduction of 42% from last year. The import target for the current fiscal year is $65.6 billion, which will require a reduction of 22%.
On a year-on-year basis, exports showed a contraction of 18.4% in November and stood at $2.36 billion against $2.9 billion in the same month of previous year, according to the PBS. In absolute terms, there was a dip of $532 million in exports.
Published in The Express Tribune, December 2nd, 2022.
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