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Huzaima Bukhari & Abdul Rauf Shakoori
The global connectivity and interdependence of economies have opened new horizons of growth and development. However, at the same time it has given rise to a phenomenon where economic and political turmoil prevailing in the world can adversely impact countries across the earth. Although COVID-19-related difficulties triggered a new recessionary situation for the world, weakening of the pandemic revived hopes for recovery but there are indicators that the global economy is again heading towards recession. This is due to high inflation, supply chain disruptions, muted growth and stagflation expected to last longer unless timely corrective actions are not taken. The World Bank anticipates a slump in global economic growth in 2022, partly because of the prolonged war between Russia and Ukraine, global inflation, and increasing interest rates. It fears several years of high inflation and low growth that can have destabilizing consequences for low-and-middle-income economies.
Pakistan is also experiencing this unfortunate situation due to increasing global energy cost and high commodity prices coupled with American dollar gaining strength against the rupee. These factors have unfolded multiple challenging situations for our economic managers, adding to our existing macroeconomic imbalances. Continuous depreciating Pak rupee, stagflation, rising bond yields, dwindling foreign exchange reserves, and increased import restrictions have affected the overall economic situation of the country. Corrective actions taken by the present government of Pakistan Democratic Movement (PDN) are proving insufficient avert the risk of default.
Amendments in the State Bank of Pakistan Act, 1956 by the previous government are also posing difficulties to meet these monetary challenges. They have left the State Bank of Pakistan (SBP) with very limited administrative role for remedial intervention. Moreover, deteriorating financial condition of the country can neither afford any adventure, nor can the government of Pakistan resolve various issues, including price control and stabilizing dollar price because of them. Though the government of Pakistan has improved its monetary policy framework by strengthening the functional and administrative autonomy of SBP, prevention of government borrowing from SBP and inserting price stability are the new policy’s primary objectives.
The Government and SBP need to take all stakeholders in confidence about the current situation to work out a way forward. The recent steps taken by SBP seem like a measure of desperation where it has restricted certain items from import adding the condition of pre-approval and decreasing the amount for opening letters of credit—conditions severely affecting businesses in an import-based economy where the business community is finding it hard in getting their goods cleared. Concurrently, it has attracted demurrages at local ports and delayed payment penalties at the international level. Further, it has been reported that certain life-saving medicines are at risk of shortage due to non-availability of imported raw materials. Additionally, automobile manufacturers are announcing production shut-down amid political uncertainty and economic distress. The recent aggressive steps taken on account of correction are taking a toll on the overall economic situation with inflation numbers and policy rates moving upwards at an alarming level. It is almost impossible for any business to leverage itself for growth or even bridge financing. If this situation persists, a wave of economic slowdown is expected which can give rise to unemployment, and hyperinflation that can culminate in civil unrest.
The government has signed a staff-level agreement with International Monetary Fund (IMF) and its board meeting for the final decision is expected sometime in August. The government expects that release of IMF’s tranche will normalize the situation. Import restrictions imposed by SBP are because of maintaining foreign currency reserves up to a certain level for avoiding any adverse situation leading to a default.
After the latest staff level agreement between IMF and Pakistan concluded on a combined 7th and 8th successful review of the programme it is hoped that IMF board’s approval will soon follow and disbursement of funds would help to alleviate the macroeconomic situation of the country. Experts opine that contrary to the prevailing hype, Pakistan cannot be clubbed with countries that are on the verge of default as the foreign debt-to-GDP ratio and the short-term component of the same is still manageable. However, they warn that in the event of failing to devise a long-term strategy for economic revival, we would be heading towards the inevitable. The successful completion of the current review and disbursement of funds from IMF is very critical at this stage as it will help to bridge external financing gaps transmitting positive signals from international markets for Pakistan.
Mere release of funds from the IMF would be inadequate to resurrect our economy. Pakistan’s need is much greater than the expected amount from IMF or Saudi Arabia, which can only be fulfilled by improved relations with the global community through trust-building measures. Our foreign office’s role is vital in restoring our relations with the international world. The present economic scenario requires that Pakistan should reverse amendments made in the State Bank Act, 1956 related to free-floating of the dollar. This can only be done when Pakistan has enough financial support from its friends so that the government could mobilize revenue without IMF’s support along with repealing laws framed on its conditions. Sole reliance on IMF without introducing structural reforms will further deteriorate our economic conditions, posing a huge risk to our national security.
In the face of worsening economic conditions, it appears that the present government is not realizing the significance of Pakistan’s economic challenges. It is very disturbing that in this “financial emergency” type situation, SBP is operating without a full-time governor since the departure of Reza Baqir after completion of his three-year term in May 2022. His position is still vacant and an important institution like central bank of the country is being run by a caretaker governor who has completely failed to control manipulators playing their devious role in destabilizing the rupee by speculative transactions.
In this grim scenario, political stability should be the first priority in the roadmap to recovery. Persistent political turmoil is adding fuel to fire and if not checked expected inflows might get delayed making the country extremely vulnerable to external shocks. Pakistan is at a critical juncture in terms of dealing with bilateral financial partners and international monetary institutions. All stakeholders’ focus must be directed to handling these grave economic issues rather than diluting energies in fighting political battles in the court and public.
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Huzaima Bukhari, Advocate High Court & Adjunct Faculty at Lahore University of Management Sciences (LUMS), is a member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions, with Dr. Ikramul Haq