Pakistan’s upcoming strategy. A power crisis looms huge, with hardly sufficient reserves to support two months’ worth of imports.
Although rapidly dwindling foreign currency reserves, which will stifle imports of crucial fuel, canola oil, and beans, Pakistan says it will not be in the same predicament as Sri Lanka, and they have made plans to replenish its deposits.
In a broadcast with News Agencies, Pakistan’s finance minister, Miftah Ismail, claimed, “There is no possibility of failure.” “Yes, we have such a plan to expand our reserves, and you will notice that they are beginning to rise.”
Ismail, a member of the Pakistan Muslim League-Nawaz (PML-N), which also actively supported a vote to depose Imran Khan’s government, was recently in the United States to lobby the International Monetary Fund (IMF) to resume the country’s $6 billion loan program, a vital source of money that stimulates the money afloat. The three-year initiative began in 2019, but it has now been suspended for the third time.
Pakistan’s foreign currency reserves have plummeted to around $11 billion, which is sufficient to fund imports for the next two months. The last time cash reserves were this inadequate was in December of this year.
Economists, on the other hand, are not too concerned, given the country has experienced similar near-crises multiple times in recent years.
“It has happened numerous times, which is not less than 13 times in the last 50 years,” said Atif Mian, a professor of economics at Princeton University, in a discussion on Pakistan’s economy that was aired online earlier this month.
According to him, Pakistan has had a chronic balance of payment deficit for years since its consumption has dramatically exceeded its exports.
According to official statistics, Pakistan had a negative trade imbalance in services and goods of $33.28 billion during the first nine months of the fiscal year, which began in July. It exported $28.85 billion in goods and services and bought $62.13 billion in goods and services. The balance of payments for the period increased to $13.17 billion, up from $275 million the previous year.
The country’s large current account deficit and depleted currency reserves have driven up the dollar rate, which hit a fresh high of 190 Pakistani rupees to the dollar on the marketplace earlier this month. With higher dollar rates, the country will have to pay more than the same amount for imported goods.
‘Untenable growth model’ is a term used to describe a business model that is not.
“India and Bangladesh do not need to go to the IMF as frequently as we do.” “It’s because Pakistan’s business strategy is essentially unsustainable,” Mian explained.
One of the main reasons for this is the scarcity of local enterprises that produce goods for export. He claimed that the country’s wealthy were focused on growing and investing in real estate, which increased their fortune and, in turn, increased demand for imported vehicles and other luxury things.
“Real estate development, cannot be marketed to individuals in New York. That does not pique their attention. Maybe IT services,” Mian speculated.
Another issue, according to Mian, is that most of those money-making sectors, such as sugarcane cultivation and processing, were all in the hands of a single individual ruling establishment who had rendered the industry “astonishingly unprofitable. Elite takeovers (profitable businesses) are also an issue in South Korea and China, he noted, but only in export-oriented sectors.
While the nation was experiencing economic difficulties, Ashfaq Hassan Khan, Principal of Social Sciences at NUST University, believed that they were not severe enough to be classified as a crisis.
Khan commented: “In the previous period, we saw the worst resource levels, which included only 14 days of imports. “We faced sanctions imposed in November 1998, and our reserves went beneath $400 million.”
“Having been there before, seen that there is no need to be concerned about a sovereign debt crisis.”
Ismail, the Minister Of finance, recognizes that the country’s heavy reliance on imports is an issue.
Ismail told new agencies, “Pakistan’s GDP is not tailored toward exporting.” “As a result, every economic cycle results in more imports, but lower exports, resulting in a currency shortage that pushes a boom-bust cycle.”
While some of these imports, such as those for gasoline, food, and energy, are fueled by popular initiatives that provide subsidies, particularly during election times, others are driven by the country’s small but strong elite. Experts warn that in the process, they are laying macroeconomic hazards for the new government.
In spite of such an acute forex crisis, we keep importing luxurious gadgets like cheese, chocolates, distinguished results and vegetables, cell phones, cars, cat and canine meals, etc., stated Dr. Shahida Wizarat, head of Economics and Director Research in the Institute of Business Management, Karachi.
“We need to cease importing these luxury goods to create fiscal space for the import of industrial machinery and raw materials,” she said.
The administration is finally doing something about it. Islamabad and the IMF had already agreed to wind back energy and fuel incentives in the near future, as well as enclose up the company tax amnesty scheme, under that some areas had their taxes reduced or exempted entirely, ahead of an IMF delegation’s visit to Pakistan upcoming month to possibly renew the Extended Fund Facility (EFF) program, that has been on standby for the third or fourth time since June the year before.
While the ensuing increase in the cost is projected to benefit the country’s finances, it is also expected to raise inflation.
That, meanwhile, is easier than it sounds since analysts feel that separating fuel costs is technically impossible.
For such time being, Pakistan is experiencing an energy shortage of much more than 7,000 watts, resulting in power failures ranging from six to ten hrs across the state.
Shehbaz Sharif tweeted on Tuesday, “I am painfully aware of the challenges people are experiencing due to pressure.” “The previous PTI government did not purchase fuel or commit to repairing and maintaining the plants in a timely manner. The electricity condition will drastically improve by May 1st, insha’Allah, once emergency measures are finally decided.”
Likewise, supplies of (LNG) Liquefied Natural Gas and heating oil in homes are also lower than they should be, exacerbating power shortages. With those prices going up, the ministry is hesitant to expand imports, particularly with its foreign reserves diminishing.
To combat this, the monetary authorities enforced hundred per cent cash restrictions on 177 products earlier this month, especially memory cards, requiring importers to deposit the amount of the goods they seek to import with the bank. The financial margins, which are likely to decrease imports of these commodities because not all importers have enough cash on hand, will be in force until December.
Likewise, the central bank imposed sanctions on auto finance last year in an effort to reduce imports in another sector, as the global automotive imports anything between 50% and 90% of a car’s parts and components. It shortened the debt repayment period from seven to five years, increased the minimum lump sum payment to 30%, and limited car loans to 3 million rupees ($16,070). As per Muqeet Naeem, a research associate at Ismail Iqbal Securities, only one thing that decelerated was auto finance.
For the time being, all eyes are focused on the approaching IMF visit. Investors reacted positively to this, as well as the announcement that the $6 billion programs could be raised to $8 billion.
On Monday, the Karachi stock exchange (kse index), which covers the country’s top 100 publicly traded companies, surged from 520 marks to more than 46,000 marks the day after the Minister of finance mentioned the possibility of resuming the IMF program. Ever since then, the score has fallen.
Edited by Prakriti Arora