The last few months have been quite a rigmarole through a warren of economic (and political) challenges. We should have expected a rocky road right from the very beginning of this year. Or at least after the Russian invasion unfolded. By April, the cat was allegorically already out of the bag. I mean — with all fairness to the incumbent coalition government — the synergy of adversities could not have been worse to handle matters at the helm of affairs — internationally and economically. But I wonder: Is it fair to blame cosmic circumstances, natural disasters, and domestic political instability for the abortive economic reality of Pakistan?
The political pundits applauded the eventful arrival of the so-called ‘Financial Wizard’ to take charge of one of the most pivotal ministries of the federal cabinet. Mr. Ishaq Dar is now in the vanguard as the minister of finance; at the nub of national economic policymaking. Surprisingly, many of my educated colleagues – seasoned analysts well-versed in political-economic analysis — also anticipated some sort of a miracle to be performed by Mr. Dar that would somehow extricate the national economy from the trenches. Well, unfortunately, that didn’t happen! But how exactly was it even possible?
During his previous stint in the office, Mr. Dar had a notoriety for over-valuing the rupee to maintain an artificial aura of a resilient economy. But the reality is that our economy is fundamentally flawed, constructed on unsustainable sources, and heavily contingent on external support. The answer to these underlying challenges was never an artificially inflated currency — and it is definitely not now!
The rupee recently failed to pare previous losses as it fell to a six-week low against the US dollar. But Mr. Dar’s financial wizardry is handicapped today because Pakistan is short of the forex reserves requisite to fuel his misbegotten agenda. The dollar reserves with the State Bank of Pakistan (SBP) are down by more than 60% since the record-high of August 2021 – hovering below $8 billion despite a recent lucre handout of $1.5 billion by the Asian Development Bank (ADB). Since these modest reserves are inadequate to contrive the rupee higher, the government has resorted to a blame game to save face.
The rearing narrative is that the commercial banks are involved in currency speculation — taking a bearish stance against the local currency. However, the problem stems from the idea – peddled by Mr. Dar, that the fair value of the rupee is in the range of Rs. 180 to Rs. 200 against the greenback. Not only is this idea utterly ridiculous and deviant from the economic tenets grounding the foreign exchange mechanism worldwide, but it could also potentially dent exports and stall essential imports. This unrealistic notion has already forged an uncanny gap between the interbank rate and the price available in the open market – incentivizing black marketeers to reign over the currency exchange landscape.
Instead of buoying unbacked confidence in the market, enacting substantive policies should be the national priority. For instance, waive wasteful subsidies to underperforming industries and support businesses with promising export potential; tax windfalls earned by state-backed energy companies to subsidize domestic energy consumption; and promote bank credit to struggling sectors. But the strategic policy underway follows a cliched (and restrictive) direction.
Import restriction to (artificially) reel in the Current Account Deficit (CAD). Taxing local traders but letting the pillaging textile and real estate sectors flourish with virtually no regulatory bearing. Do we just pretend that banks are actually earning profits by lending credit to performance-oriented businesses and not nurturing government debt to plug the spending deficit that keeps circulating? It is a tortuous cycle that keeps piling debt and exigency on the national exchequer while letting the economy fester for the subsequent political entity to mend.
The government could indulge in extensive domestic borrowing at prohibitive rates benchmarked by our own central bank – to finance redundant industries and mafias instead of boosting export-focused businesses to make headway for the national economy. It would invite expensive foreign loans and plead for aid rather than paving investment avenues for long-term prosperity. It could slap taxes at the bottom of the social pyramid but can’t expand the tax base. I mean, for crying out loud, our economic model is visibly unviable, practically pushing us (with each passing day) toward financial implosion!
We are celebrating that our CAD lowered by a third in October compared to last year. But we don’t realize (or overtly overlook) that it was not a marvel of export earnings but a result of import curbs and falling international commodity prices. The CAD in FY23 is forecasted to settle in the $7-$8 billion range. But it is not due to increasing productivity or decreasing import reliance; it is due to an aggressive cut in machinery imports and declining procurement of covid vaccines – leading to a fall in net import payments. Some could argue that the import bill inflated due to a confluence of factors: lingering effects of the pandemic and the tremors of the war in Ukraine. But the argument then goes both ways: Without a record flow of remittances during the pandemic and an export-earning bonanza due to a rising dollar, our forex reserves would have been in much worse shape.
Global investors are not stupid, which clearly reflects in the default risk premium of Pakistan. Despite repeated assurances by Mr. Dar regarding the payment of $1 billion Sukuk, maturing on Dec. 5, Pakistan’s five-year Credit Default Swap (CDS) – a de facto litmus test of investors’ sentiment regarding sovereign credit risk – has spiraled to a record-high of 123%. For context, the CDS hovered around 4% back in January 2021, right in the midst of the pandemic. But what exactly went wrong if Covid is not to blame? Partly, the growing strength of the US dollar has made it increasingly difficult for emerging economies to service their debt denominated in the greenback. While the US Federal Reserve continues to raise interest rates, the currency crisis would only worsen across the developing world as countries are getting battered by rising prices of gasoline and grain, (unsurprisingly) also priced in the US dollar.
Yet, the political uncertainty and stagnant economic policymaking endemic to Pakistan have further debilitated the national economic outlook. The efflux of investments, unrelenting skepticism of crucial bilateral and multilateral creditors, and the slowdown in the flow of remittances as the world tips into a recession – all these factors have played their respective parts, shaping the current economic misery.
Pakistan is expecting the ninth review of the IMF to receive $6-$8 billion by June 2023. It is a historical phenomenon that a country under the hood of an IMF program doesn’t default. However, what will happen after the IMF program concludes in six months? No one seems to know the answer! Pakistan is to repay $25-$26 billion in FY24; that is why the 2024 and 2025 government bonds are trading at pennies on the dollar in the international market. The government is busy faulting the floods, awaiting some solatium in the name of climatic justice from the advanced economies. But there isn’t even a reckoning that our exports are unsustainably dependent on agricultural output. And a wash of crops virtually effaces more than half of our export earnings while domestic consumption triggers additional imports. The government doesn’t realize that remedial proceeds (if they even actualize) would only defray the costs of infrastructural damage and reconstruction. It is not a solution that would chasten the pressure on the economy, nurtured by decades of blinded economic policymaking and reliance on foreign bailouts.
To fix the economy, once and for all, Pakistan needs an economic nucleus independent of any political dispensation or bias. Import restriction is not a healthy and sustainable precedent, no matter how pertinent it seems today. Instead, import substitution should be the policy goal, led via empowering export-led growth. It would only be possible by shunning our skewed reliance on agriculture, diversifying our export base and markets, and inviting investors instead of creditors. Lastly, manipulating the rupee-dollar parity is one of the most misguided strategies Mr. Dar popularized. Pakistan needs to make its exports more competitive in the international market, a vision that goes down the gutter when the rupee is inflated beyond its bona fide value – drifting export orders to regional competitors like India and Bangladesh. Policymakers should focus on stabilizing the rupee and consolidating the domestic forex markets without strangulating traders via regulations.
Political uncertainty is definitely a vice. But let’s face it, Pakistan is not the only country with a political impasse. And it is not even the worst one! The key is the right balance between regulation and confidence – something that can be achieved even without a sweeping political overhaul. Ultimately, we need to shun the narrative that a financial wizard, a bailout package, or even a change of civil-military command could magically bring harmony to the national economy. Only structural reforms could break this seemingly perennial hex of dependence, desperation, and near-default experiences.
[Photo by U.S. Institute of Peace, CC BY 2.0, via Wikimedia Commons]
The views and opinions expressed in this article are those of the author.
Syed Zain Abbas Rizvi is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Rizvi has written extensively on foreign policy, historical crises and economic decision making of Europe and the US.
