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PKR slide: SBP must act proactively

In these times of unprecedented economic emergency in the country, the Pakistan Tehreek-e-Insaf (PTI) Chairman, Imran Khan, is reported to have agreed to sign the “Charter of Economy (CoE)” in his meeting this week with a delegation of the Rawalpindi Chamber of Commerce &Industry. Rawalpindi Chamber has prepared the ‘CoE’ and started a campaign to bring all the political parties on the same page to get the country out of the economic mess.

This appears to be a promising development and an act of political adversaries coming together on matters of grave national interests. The then leader of the opposition, Shehbaz Sharif, upon formation of the government by PTI had underscored on the floor of the assembly the need for a charter of economy and volunteered his support for it. The animus between the treasury and opposition benches prevented it from happening. Hopefully, this time better sense will prevail and the politicians of the country will rise to the occasion with the Business Chambers of the country acting as catalysts to help the political parties reach a consensus on this single point national agenda.

These are very difficult times for the global economy. The International Monetary Fund (IMF) this week scaled down the global GDP forecast to 3.2 percent in 2022 and 2.9 percent in 2023, terming the global economic outlook “gloomy and more uncertain”. Likewise, the World Bank (WB) slashed the global growth to 2.9% for FY23 due to the Russian invasion of Ukraine that has caused a severe downturn.

The State Bank of Pakistan (SBP) this month, while making a monetary policy statement, slashed down Pakistan’s GDP growth projection to 3 to 4 percent against 5 percent for the financial Year 2022-23, whereas, the WB in its June 2022 Global Economic Prospects also forecast Pakistan’s GDP growth at 4 percent in 2022-23.

The advanced and emerging markets around the globe have all scrambled to safeguard their food, energy and essential goods security in the face of a looming catastrophe. The most vulnerable will be the emerging markets who would feel constraints in exports, money supply, supply chain disruptions and price volatility – especially in the energy sector. Pakistan will have to confront all these challenges.

On the contrary, the incumbent government has so far not rolled out the much-needed comprehensive strategy or a contingency plan to safeguard the interests of the country and its people. The IMF and financial support from friendly countries and other lenders is the primary source of salvation that Pakistan appears to be depending upon. And this too is shrouded, so far, in uncertainty. This relief if materialised would carry the country up to the year’s end. But then what after that?

The industry and businesses are all confused and at a loss as to how to go about their businesses in this state of unending fall of PKR against the dollar and high interest rates. Also, there is a trust deficit between businesses and the government on account of changing narratives presented by the government on the country’s fiscal and economic stability — much against the ground realities which are speaking for themselves.

In a span of a mere two weeks the Federal Finance Minister, in his varying public statements, has changed the narrative of the country being near to default to all well with no threat whatsoever for the country going into a default. Neither sounds convincing.

The industries are closing down, people laid off and the business community is in panic on account of the freefall of PKR. “The government must fix the dollar rate for 15 days to cope with the situation,” stressed Acting FPCCI President Suleman Chawla. “We, as a nation, do not have many choices and the government must act now decisively,” he pointed out. Pakistan Yarn Merchants Association (PYMA) Chairman expressed disappointment over the State Bank of Pakistan’s (SBP’s) failure to intervene in the market with a view of arresting the PKR slide, saying that a soaring dollar has put SMEs, industries and businesses at risk. He demanded the SBP take concrete steps to help stabilise the currency as businesses and industrial activities are badly affected, especially small and medium enterprises (SMEs) are facing high financial losses. “The government, politicians, all institutions including the State Bank of Pakistan (SBP), will have to play their role to lift up the rapidly sinking economy and save the country from an economic collapse,” remarked Lahore Chamber of Commerce and Industry (LCCI) President. Sinking rupee is quoted as one of the main causes of the economic meltdown.

Finance Minister Miftah Ismail this week, in the midst of this panic, is reported to have stated that the government intervention in foreign exchange (forex) market cannot be made to control the rate of dollar in light of the commitment with the International Monetary Fund (IMF).

This again does not sound convincing. Many of the economic experts of the country term the dollar rise as partly speculative, driven much by political uncertainty and profit-taking by speculators. The fiscal situation of the country is bad but not that bad as to justify a free fall of rupee to this level. There is much more to it than meets the eye. It is not understandable why the IMF would object if measures are taken by the SBP to correct the induced distortion of rupee value.

The then governor of the State Bank of Pakistan, Dr Reza Baqir, who was a signatory to the present IMF programme, often intervened to manage and arrest the rupee slide when dollar was subjected to speculation by balancing the supply and demand dynamics of the currency parity and maintaining it in a band supported by the country’s fiscal strength. This corrective alignment is permissible, but, apparently not exercised by the incumbent government. There must be some underlying strong reasons for not doing so.

The IMF, as per its standard guideline, vests all powers with the Governor and the board of a fully autonomous SBP to manage the currency parity as per the prevailing market dynamics and strength of the country’s financials. It is inconceivable that the IMF would usurp and restrict the independence and authority of the central bank to react under abnormal circumstances where the very economy and fiscal position, which the IMF is supporting, is severely threatened. There has to be a better answer to the plight of our PKR.

Farhat Ali, "PKR slide: SBP must act proactively," Business recorder. 2022-07-30.
Keywords: Economics , State Bank , Economic emergency , National interests , Economic experts , Foreign exchange , Global economic , World Bank , Global growth , Shehbaz Sharif , Reza Baqir , Imran Khan , IMF , GDP , PKR , SBP , PYMA , PTI

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