If we had to pick a single metric to assess the country’s economy, it would be the rupee’s performance against the dollar. Finance Minister Dar, no doubt, recognises this, which explains his emphasis on the value of the local currency unit since resuming leadership of the Ministry of Finance.
Unfortunately, even when measured against the chosen touchstone, the strategy appears to have failed. Indeed, the disproportionate emphasis on the rupee’s value may be doing more harm than good by gradually driving foreign currency remittances into the grey market as the price differential between the interbank and open markets widens.
Pakistan’s chronic inability to earn foreign exchange in proportion to its hard-currency spending needs is the root cause of the rupee’s decline. It is also well known that for decades, our preferred method of bridging the gap has been to borrow, which is why our economy has become reliant on debt inflows just to stay afloat.
This is precisely why the markets recognise that we are in trouble when an inflow does not arrive on time. And the markets are aware that a $1.18 billion tranche of IMF funding is being held up due to disagreements over how to approach the ninth review of the $7 billion Extended Fund Facility (EFF), which had only recently gotten back on track before Dar intervened.
Can we really blame the markets for being nervous when our foreign reserves have dwindled to as little as $6.7 billion, especially given that the majority of this amount is locked up in deposits by Saudi Arabia, the UAE, and China?
As things currently stand, the only way to realise and sustain those inflows is to repair ties with the IMF. The finance minister is aware of this, which explains why the ninth review is being dragged out. Pakistan has repeatedly stated its determination to complete the IMF programme, but the finance minister has implied that the country can continue without the fund’s assistance.
It’s unclear whether we’re trying to strike a hard bargain or dithering over a difficult decision. It doesn’t help that the government has no wiggle room to strike a deal. As a result, markets have begun to view Pakistan’s relationship with the Fund as troubled, if not outright broken. This is a dangerous situation, and the government bears sole responsibility for resolving it as soon as possible.
The likely sticking point in the review appears to be Pakistan’s promise to produce a small primary surplus at the end of the current fiscal year, which the IMF staff does not see happening unless the government finds new revenue streams. Dar is understandably wary of burdening an already struggling populace, especially as an election year approaches.
Allowing the economy to deteriorate for months while the EFF tranche is held up may prove to be more costly, both economically and politically, than imposing new taxes. As a result, the better option would be to take charge of the situation right now.
The economy has gone as far as it can while coasting. Now is the time to put the pedal to the metal and steer it in the right direction. With or without a mini-budget, the government must get its act together. The alternative is unbearable to contemplate.