Financial Ministry and SBP: “Economic issues are transient and are being forcefully tackled.”
In a joint statement, the Finance Ministry and State Bank of Pakistan (SBP) guaranteed that the nation’s issues were transient and that they were being aggressively addressed.
According to the joint statement, Pakistan’s foreign exchange reserves have decreased since February as a result of outflows of foreign currency outpacing inflows.
On the other hand, the inflows primarily consist of multilateral loans from the World Bank, Asian Development Bank, International Monetary Fund (IMF), bilateral loans and deposits from China, Saudi Arabia, and the United Arab Emirates, as well as commercial borrowing from foreign banks and through the issuance of Sukuks and Eurobonds.
The statement said that the next IMF programme review’s completion delay was a major factor in the lack of inflows. While this has been happening, on the side of outflows, debt servicing on foreign borrowing has persisted as these debts’ repayments have been due over this time.
The currency rate has been under a lot of pressure as well, according to the statement, particularly since mid-June. It attributed the depreciating rupee to a number of factors, including a general tightening of the US dollar, an increase in the current account deficit (which was made worse by a large energy import bill in June), a decline in foreign exchange reserves, and worsening sentiment due to uncertainty surrounding the IMF programme and domestic politics.
It was noted that recent significant events will deal with both of these transient problems.”A crucial staff-level agreement on concluding the following IMF review was secured on July 13. As of right now, all prerequisites for concluding the review have been satisfied, and the formal Board meeting for allocating the subsequent $1.2 billion tranche is anticipated in a few weeks.
At the same time, fiscal and monetary macroeconomic policies have been suitably tightened to lessen pressures brought on by demand and control the current account deficit. Last but not least, the government has made it plain that it intends to complete the remainder of its term through October 2023 and is prepared to carry out all the terms agreed upon with the Fund over the remaining 12 months of the IMF programme, according to the statement.
Under the current IMF programme, Pakistan’s gross funding requirements in FY23 will be more than covered. A $10 billion current account deficit and $24 billion in principal repayments on external debt are the causes of the funding requirements.
It is crucial for Pakistan to be slightly overfinanced in comparison to these needs in order to strengthen its foreign exchange reserves position. A $4 billion supplemental cushion is therefore anticipated during the following 12 months.
This financial commitment is being organised through a variety of avenues, including with friendly nations who supported Pakistan in a comparable manner at the start of the IMF programme in June 2019.
A number of significant steps have been taken to reduce the current account deficit. The large current account deficit in FY22 was primarily caused by high domestic demand (growth reached almost 6% for two years in a row, leading to economic overheating), artificially low domestic energy prices as a result of the February subsidy package, an unplanned and procyclical fiscal expansion, and significant energy imports in June to reduce loadshedding and increase inventories.
The energy subsidy package was reversed, the policy rate was raised by 800 basis points, and the FY23 budget aims for a consolidation of approximately 2.5 percent of GDP, focused on tax hikes while safeguarding the most vulnerable, in order to limit this deficit moving ahead. As a result, household demand for fuel and power will be reduced.
Temporary administrative actions have also been made to control the import bill, such as requiring prior authorization before importing machinery, autos, or mobile phones. As the current account deficit decreases in the upcoming months, these measures will be relaxed.
As a result of these actions, the import bill dramatically decreased in July as non-energy imports continued to fall and energy imports fell.
In comparison to June, foreign exchange payments were much lower in July. Both oil and non-oil payments fall under this. In total, payments decreased from $7.9 billion in June to a manageable $6.1 billion in July.
The most recent trade statistics show that non-oil imports are still declining. In particular, non-oil imports decreased by 5.7% quarter over quarter in Q4 FY22. They are anticipated to decrease much more in the future.
Looking ahead, LC opening has significantly slowed down recently, once more for both oil and non-oil commodities. According to market data, the volume of sales for Oil Marketing Companies fell by 11% from one month to the next in June.
Following the spike in energy imports in June, the nation now has a store of diesel and furnace oil that will last for 5 and 8 weeks, respectively. This is a significant increase from the previous average range of 2 to 4 weeks.
This suggests that future petroleum imports won’t be as necessary. Hydroelectricity is expected to grow as a result of the recent rains and water storage in the dams, and the demand to produce power using imported fuel is anticipated to decrease in the future.
These trends suggest that the import bill will decrease moving forward, which should start to show up more forcefully in decreased FX payments over the following one to two months.
Overall, a decline in global commodity prices, higher oil reserves, the unfolding effects of higher domestic petroleum product prices, changes to electricity and gas tariffs, the elimination of tax exemptions under the FY23 budget, administrative steps taken to limit imports, and the lag effect of the monetary and fiscal tightening that has been undertaken all contribute to the expectation that imports will decline in the coming months.
The rupee has temporarily overshot, but over the following six months, it is anticipated that it will rise in line with fundamentals.
Approximately half of the rupee’s decline since December 2021 can be traced to the US dollar’s global rise as a result of the Federal Reserve’s record tightening and increased risk aversion.
A portion of the other half is driven by domestic fundamentals. Specifically, the growing current account deficit, particularly during the past few months. When previously mentioned, as the sudden rise in the import bill is brought under control, the deficit is anticipated to decrease going forward. The Rupee is anticipated to progressively strengthen as a result of this.
The remaining decline has been exaggerated and motivated by emotion. Due to worries about domestic politics and the IMF programme, the rupee has overshot. Because of the uncertainty’s resolution, the sentiment-driven component of the rupee’s depreciation will also wind down in the near future.
The State Bank has continued to intervene where the market has become chaotic by selling US dollars to calm the markets and will do so in the future as needed. Strong measures, such as tight supervision and inspections of banks and exchange companies, have also been adopted to counter any speculation. As the case requires, additional precautions will be implemented.
There is no truth to the rumours that the IMF and the government have agreed on a specific exchange rate level. The currency rate is flexible and determined by the market, and it always will be, but any erratic changes are reined in.
Going forward, we fully anticipate the rupee to strengthen as the current account deficit is reduced and sentiment increases. Indeed, this was the situation at the start of the IMF programme in 2019, when the Rupee recovered significantly following a period of weakness before to the programme.
It is obvious that the rupee is capable of temporary overshoots, as it recently did. But over time, it shifts in both directions. In the upcoming time, we anticipate seeing this pattern emerge once more.Because of these improved fundamentals, which include a reduced current account deficit and stronger sentiment, the rupee should appreciate.
