Eroding foreign exchange reserves rendering State Bank of Pakistan helpless

One of the prime mandates of the central banks around the world, particularly of the third world countries, is to manage exchange rate efficiently and effectively, and State Bank of Pakistan (SBP) is no exception.

However, the recent free-fall of parity raises many questions that include:

1) Isn’t SBP allowed to intervene?

2) Has SBP lost capacity to intervene?

3) Aren’t some groups having vested interest responsible for the present trauma?

 With the utmost disgust, I have to say that the SBP is helplessly watching from the sidelines as the rupee is registering from one all-time low to another low.

Even a Pakistani of ordinary wit understands that in the absence of enough foreign exchange reserves, the SBP can only watch the trauma helplessly.

Please allow me to say that purposely created political turmoil has become the source of all kinds of shocks, pushing Pakistan to imminent default.

Added to political instability are: 1) structural weaknesses of the external sector, 2) higher global prices of fuel and food commodities, 3) geopolitical pressures rendering Pakistan helpless and 4) delay in the revival of the International Monetary Fund (IMF) program.

Between April 7 and July 22, rupee has lost more than 21% value against US$.

Now, the most disturbing question is how long will the rupee continue to decline?

I am afraid neither the Government of Pakistan (GoP), nor the SBP has the reply. Copybook reply being presented is, “Things will become better when US$ 1.17 billion tranche is released, hopefully in last week of August”.

However, analysts say Pakistan needs around US$35 billion for debt serving etc. Therefore, IMF tranche is peanuts and inflows from China, Saudi Arabia and UAE will provide a temporary breathing space only.

One needs not be a genius to understand that if Pakistan’s import bill of goods and services continues to eat up more than 90% of the foreign exchange earnings through remittances, export proceeds and foreign investment then hardly anything is left for external debt servicing.

I am forced to infer that the GoP will continue to borrow for debt servicing and will never attain comfortable level of foreign exchange reserves in the foreseeable future.

Pakistan: Federal Budget Hoping Against Hope

Certainly concerted efforts have been made to mend relationship with International Monetary Fund (IMF) while preparing Federal Budget for the next financial year.  Intentions may be good but a lot will depend on the commitment and plans to meet the targets. 

Keeping in view the fragile nature of the coalition government, diversity in the mind set of party leaders and high commodity prices, there is many a slip between the cup and the lip.

The Government of Pakistan, in Federal Budget FY23 has set a GDP growth target at 5% and inflation at 11.5%. Many analysts say that the GoP will have to make extra efforts to achieve these targets, mainly because the central bank has already raised policy rate by 675bps another 100bps is anticipated in the name of tightening of monetary and fiscal policies.

Inflation target will also likely be missed as global commodity prices are likely to remain on upward trajectory. The inflation and Petroleum Development Levy (PDL) collection target are at odds. The PDL collection target has been set at Rs750 billion for FY23. There is hardly a realization that higher PDL collection will result in CPI outages, conversely efforts to contain CPI may result in shortfall in PDL collection.

Other than the aggressive PDL collection targets, which will likely be missed, the GoP has done well to protect masses from further inflationary pressures. Personal income taxes have also been relaxed which will improve purchasing power of the masses and help in face saving of the coalition government.

The tax collection target is a slightly lower than Rs7.3 trillion which was initially being reported in the press, but still represents a 17%YoY jump from estimated collections in FY22. Efforts have been made to make taxation more equitable, with new revenue measures targeting large landowners and the big corporates and retailers. However, little effort has been made to bring agriculture sector in the tax net.

The budget projects a uniform increase in all major taxation heads, including direct taxation, sales taxes, custom duties and FED but the most notable increase comes from the projected Rs750 billion collection of PDL. Given the soaring crude oil prices in international market, analysts see a likely shortfall in collection under this head which will need to be compensated elsewhere.

Similarly, target of GIDC for FY23 is set at Rs200 billion which is also less likely to be achieved. It may be recalled that the GoP had collected a paltry amount of Rs14 billion under this head during 9MFY22. Out of the incremental tax collection targeted for FY23, the new tax measures are estimated to bring in up to Rs375 billion whereas the remaining amount will be generated through growth in Nominal GDP.

The total outlay envisaged in the budget FY23 is Rs9.5 trillion; out of which current expenditures are targeted at Rs8.7 trillion, while the development expenditures are estimated at Rs808 billion. Of that, the Interest payments are estimated at Rs3.95 trillion, up 29%YoY. This constitutes a whopping 45% of current expenses and 42% of the overall expenses.

The defense expenditures are estimated at Rs1.5 trillion – up 11%YoY, which constitutes 18% of current expenses and 16% of overall expenditures.

Federal Pension expense is estimated at Rs530 billion - up 0.7% YoY as against revised estimates of Rs525 billion for FY22. Furthermore, government plans to setup a pension fund which is likely to fund pension expenditures going forward.

Subsidy disbursements are slated to shrink to Rs699 billion for FY23 from Rs1.5 trillion for FY22. To recall, GoP announced a generous package of subsidies on the consumption of fuel and electricity during 2HFY22 which resulted in the slippages under this head.

Analysts expect the total debt servicing cost to exceed the budgeted target of Rs3.1 trillion as the budget document estimates hefty contribution from external sources for budgetary funding. They expect heavier reliance on local sources for budgetary borrowings where the cost of debt will be higher, thus pushing the overall debt financing number even higher.

This article was first published in Eurasia Review