Dar blows hot and cold about finances

ISLAMABAD:

 

On a day when Pakistanis haplessly saw the exchange rate dipping to the lowest level, interest rate jumping to the highest level and inflation touching the 50-year high, a frustrated Ishaq Dar has blamed “anti-Pakistan elements” for the fiasco.

The finance minister on Thursday took to the social blogging website – Twitter – to express his frustration and at the same time giving positive news that the “negotiations with the IMF (International Monetary Fund) are about to conclude”.

The tweet conveyed a message that all the negative impacts on the economy were solely caused by external factors, which may not be entirely true. Moreover, it hinted towards Pakistani authorities' assertion that the IMF was moving the goalposts in the middle of the negotiations.

“Anti-Pakistan elements are spreading malicious rumours that Pakistan may default,” stated the economic czar. He described them as completely false and contrary to facts.

The tweet came 48 hours after a background briefing by the government officials blamed the IMF for changing the goalposts. However, people familiar with the discussions told The Express Tribune that all the IMF’s prior actions for the board meeting were in line with the Memorandum for Economic and Financial Policies (MEFP) that the country had signed off on a few months ago, including making the power sector viable.

March 2, 2023 will be remembered as the day when the interest rates peaked to the highest level at 20%, exchange rate to the lowest level – at Rs285 to a dollar -- and inflation at 31.5%, indicating that the country is fast heading towards hyperinflation. The fiasco was because of the government's mismanagement that could not ensure orderly and timely implementation of the conditions agreed with the IMF.

Just little over five months ago, a confident Dar would not have imagined a time would come when he would be issuing statements to express his frustration over the fact that the rupee had plunged to a historic low -- an area that used to be his forte during his last two stints as the finance minister.

Just hours before his twitter outburst, the central bank had announced that the value of the rupee against the interbank had sunken to the lowest ever level of Rs285 to a dollar. In a single day, the rupee lost its value by Rs19 –the second worst performance after the highest ever loss of Rs25 to a dollar on January 26 -- also under Dar’s watch.

The monetary policy committee on Thursday increased the interest rate by 3% to 20% -- the highest ever in Pakistan’s history.

The fiasco happened because of the government’s insistence to keep trying to control the exchange rate without having significant reserves in the coffers.

Pakistan had committed to implement a market-based exchange rate at the beginning of the programme with the IMF. The PML-N government endorsed this policy when it asked the IMF to extend the bailout package in June last year.

Since the arrival of Dar at the helm of affairs in late September last year, the dollar gained by Rs55.4 or 24% -- contrary to his announcement to bring it down to Rs180 to a dollar. During the tenure of the Pakistan Democratic Movement government of Shehbaz Sharif, the rupee has lost its value by Rs101 or about 55% -- unleashing miseries on the people in the shape of imported inflation.

It was Pakistan that reopened the issue of market-based exchange rate during the recent round of talks but the IMF did not agree to the government’s new position, according to people involved in the discussions.

In his tweet, Dar also commented on the status of the IMF negotiations, which began on January 31 and have still been going on virtually.

“Our negotiations with the IMF are about to conclude and we expect to sign a staff level agreement with the IMF by next week,” according to the finance minister.

Both sides are now finetuning the language of the new MEFP -- the set of economic and financial policies aimed at making sure that Pakistan does not reopen the politically-sensitive issues like power sector, exchange rate and monetary policy during the time of the 10th review of the IMF programme again.

The finance ministry sources said that on Tuesday there were four outstanding issues -- increase in the interest rate, leaving the exchange rate to the market forces, slapping electricity surcharge and bridging $7 billion financing gap -- hampering the deal with the IMF.

They blamed the IMF for changing the goalposts but the Letter of Intent and the MEFP signed by former finance minister Miftah Ismail and the SBP governor show that there was no change of the goalpost by the IMF; rather it was pushing Pakistan to implement its commitments.

During the past 48 hours, the government has met three out of four actions, except the bridging the financing gap.

The IMF has projected the external financing gap at $7 billion compared to $5 billion being worked out by the Ministry of Finance. In order to end the difference, the Pakistani authorities had requested the IMF to lower the current account deficit projection of $8.2 billion by $1 billion.

The IMF sees its projections in line with the broader macroeconomic framework and the government might not be able to get any major relaxation here.

Except China no foreign nation has yet to come up with a helping hand, as every country is now looking towards the IMF deal to make sure that Pakistan behaves fiscally.

Dar said that “all economic indicators are slowly moving in the right direction and the SBP foreign exchange reserves have been increasing and are almost $1 billion higher than four weeks ago despite making all external due payments on time”.

He added that foreign commercial banks have started extending facilities to Pakistan -- in a veiled reference to the Chinese commercial loans totaling $2 billion from end February to end March.

The SBP said that it received $700 million as a commercial loan disbursement from China, taking total reserves to $3.8 billion.

The central bank stated on Thursday that there is a total of $7.2 billion in debt servicing in the remainder period of this fiscal year. SBP Governor Jameel Ahmad expressed the confidence that $3 billion of the amount will be rolled over. Out of the remaining $4.3 billion, the governor also conveyed in a briefing that $1.3 billion is expected to be refinanced, which would result in a net repayable amount of $2.9 billion for the remainder of the fiscal year.

The in-door briefing was held in Karachi after the Monetary Policy Committee meeting, which increased the key policy rate to 20% -- the highest ever in the country’s history. The meeting was convened on the demand of the IMF, which the central bank had to meet to remove one of four hurdles.

The SBP’s statement was silent on the growth rate projection for this fiscal year and closed the issue in one sentence “on growth, however, there exists a trade-off”.

The central bank did increase its inflation forecast to 29% -- up from its original forecast of 18% just eight months ago.

The government has also accepted the IMF’s demand for slapping Rs3.23 per unit surcharge as a “permanent” fixture to recover Rs335 billion additional from consumers every year.