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Pakistan: grave economic distress

On 26 January 2023 inanely shackling the dollar to what was nothing but wishful thinking ended and the interbank rate has been rising ever since – a policy decision in practice since October 2022 that has blatantly challenged the capacity of the second economic team leaders appointed by the incumbent government – Governor State Bank of Pakistan Jameel Ahmed appointed on 26 August 2022 and Finance Minister Ishaq Dar on 27 September 2022.

Better sense finally prevailed not because Dar/Ahmed’s economically untenable policy was challenged by any cabinet member or because the two economic team leaders became convinced that the policy was flawed as two days previously, on 23 January, Jameel Ahmed vigorously defended this policy during his post-Monetary Policy Committee press conference and on a private television channel a day later while Dar was allowed to set off for Qatar to seek a billion or two billion dollars as deposits in the SBP – an objective in which he was unsuccessful as widely predicted. The policy, so goes the grapevine, was reversed by powerful stakeholders as the International Monetary Fund (IMF) refused to set a date for the ninth review mission unless the interbank rupee was decontrolled – a mission on whose success depended the disbursement of pledged assistance by other multilaterals and friendly countries that include China, Saudi Arabia and the UAE.

The question is whose performance with respect to the mechanism for setting the rupee value was preferable from an economic perspective: the first team comprising Miftah Ismail and Acting SBP Governor Murtaza Syed or the second team?

Miftah Ismail, who has emerged as Dar’s nemesis since his summary dismissal, has been much in the news lately criticizing the policy of keeping the rupee at a rate that could not be supported through market intervention given the country’s appallingly low foreign exchange reserves. However, during his short tenure the rupee erosion was higher than during the second team’s tenure – from 186.28 interbank on 9 April 2022 the day the vote of no- confidence was successfully passed by parliament against the Khan administration to 239 rupees to the dollar on 2 August 2022 – a decline of 28 percent. Meanwhile, the decline in the interbank rate since 26 January when control over the rupee’s external value was loosened the rupee erosion has been less than half, though it began strengthening since Wednesday past as the ninth review talks reached their successful conclusion, though if one takes account of the initial strengthening to 216 in October last year and parity at 273 prior to Wednesday, the erosion is nearly 26 percent. The question is: why is the second economic team leaders being held more responsible when the actual rupee erosion was less during their tenure?

During the Ismail/Syed tenure though the rupee erosion was higher yet, on average, the difference between the interbank rate and the open market rate was less than a couple of rupees per dollar and there was no grey market for dollars. Ismail went on record to state that the slide is due to political turmoil and not due to economic fundamentals which he contended would subside in a few days – an assessment and conclusion that was proved wrong as the report ordered by Prime Minister Shahbaz Sharif to investigate the matter led to the conclusion that commercial banks were manipulating the rate thereby creating disorderly market conditions. Jameel Ahmed on 5 October 2022 confirmed to the National Assembly Standing Committee on Finance and Revenue that 8 banks were under investigation and named seven. On 23 January 2023 Ahmed revealed that the amount involved was 100 billion rupees and that the SBP was engaged in determining the penalty to be imposed on each bank.

However, what is significant is that in August 2022 the two economic team leaders convinced the IMF that the rupee slide was due to disorderly market conditions – a condition that allows for flexibility in monetary policy decisions accounting for the seventh/eight review documents to urge the authorities to rely on exchange rate flexibility as a means to address the balance of payment pressures – an economically sound suggestion that was ignored by the second economic team, thereby leading to: (i) a widening differential between the interbank rate, the open market rate and the rate at which dollars were available, thereby creating a thriving grey market. On 25 January, a day before the policy was finally abandoned, the differential was between 40 to 50 rupees per dollar. This led to (ii) a significant decline in remittance inflows (one billion dollars during the first five months of the current year against the comparable period of the year before) as overseas Pakistanis opted to remit through the illegal hundi/hawala, a mechanism that had ceased due to global lockdown as a consequence of the pandemic; and (iii) the steady fall of foreign exchange reserves, 2.916 billion dollars as of 3 February 2023, expected to decline further as and when payments on loans become due given that the IMF team refused to schedule the ninth mission unless this policy was reversed; and (iv) export revenue declined as exporters were reluctant to remit the money on the expectation that the rupee will erode further.

Thus while the first economic team must bear responsibility for being blithely unaware of banks engaging in manipulating the rupee value vis a vis the dollar and raking in windfall illegal profits, banks that operate in the legal sector, yet the second team made fundamental errors that even a freshman economic major would have refrained from. In the country’s history finance ministers have either lacked requisite qualifications or the backing of the cabinet to implement politically challenging policies which sadly did not prompt any resignations, only private laments against those perceived to be responsible.

To conclude, Pakistan no longer has the luxury of making mistakes in appointments and it is imperative that the government revisits its selection criteria largely based on myths of past performance, at least for critical portfolios – and today there is no portfolio of greater importance than Finance given the existing economic impasse. The Finance portfolio must be entrusted to someone who has relevant academic qualifications that would generate the possibility of out of the box thinking plus an ability to take politically challenging decisions that no longer can be postponed and in case of opposition by the Cabinet to have the gumption to resign that would bring the un-salutary motives of those resisting reforms.

Anjum Ibrahim, "Pakistan: grave economic distress," Business recorder. 2023-02-13.
Keywords: Economics , Monetary policy , State Bank , Monetary fund , Jameel Ahmed , Miftah Ismail , Shahbaz Sharif , Pakistan , China , Saudi Arabia , SBP , IMF

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