The interim government’s crackdown on illegal foreign currency trading, electricity and gas theft, and sugar hoarding across Pakistan are all occurring simultaneously and are yielding some initial results.
The rupee has regained some of its lost value against the US dollar, sugar prices, which had soared in recent weeks, have started to fall and the rate at which electricity is being stolen from utilities has slowed.
Actions against wrongdoers are expected to continue for a simple reason. That is, the International Monetary Fund (IMF) is unwilling to allow managers to continue maintaining the status quo in economic matters. And the crackdown on fraudsters continues. It was launched with the full support of the military’s highest leadership.
The State Bank of Pakistan (SBP) has announced a comprehensive strategy to stem the outflow of US dollars from the country and will strip licenses of low-grade (B category) foreign exchange companies if they do not upgrade within three months. asked them to take the risk of being exposed.
A crackdown on unscrupulous foreign exchange dealers, commodity hoarders, electricity and gas thieves, and easing election uncertainty could boost business morale in the short term.
The government announced the establishment of a special court to try electricity and gas theft. The state government is working more closely with law enforcement agencies to tackle sugar hoarding and smuggling.
Caretaker Prime Minister Anwarul Haq Kakar dispelled the impression that a caretaker government was entrenched, telling the people that his government was ready to hold general elections as soon as possible.
All these positive events should ideally boost the company’s confidence, which has remained low until recently. According to a Gallup poll published in the daily newspaper just a week ago, 72% of the 500 sample companies surveyed were concerned about Pakistan’s debt default, of which 49% expressed very high concern. did.
The crackdown on unscrupulous foreign exchange dealers, commodity hoarders, electricity and gas thieves, and the easing of election uncertainty are likely to keep businessmen’s morale high for some time to come.
However, these measures are not enough to ensure that the external sector weaknesses that remain at the heart of Pakistan’s economic crisis are somehow addressed. Administrators and those in power know this.
As such, Prime Minister Kakar and the military leadership have no concrete plans for the Special Investment Facilitation Council (SIFC) to seek long-term foreign investment of between $25 billion and $50 billion from Saudi Arabia, the UAE, Kuwait, Qatar and other countries. I personally told businessmen that there was. .
They said foreign direct investment would soon start flowing into five key sectors: agriculture, defense production, mines and minerals, the power sector and information and communication technology.
This sense of security is reassuring and can have a positive psychological impact on the business environment. But when it comes to starting the implementation of plans seeking foreign direct investment, how quickly even a fraction of the promised funds will be deposited into the country, and how quickly general elections can be held and the elected government run smoothly? How will the new government be able to effectively promote the SIFC policy?
On the other hand, the country continues to suffer from a shortage of foreign currency, and SBP’s foreign exchange reserves have declined mainly due to the repayment of large amounts of foreign debt.
Foreign exchange reserves stood at $7.78 billion for the week ending September 1, barely enough to cover just seven weeks’ worth of imports. And despite the recent gains, the rupee has already depreciated by 6.62% from July 1 to September 7.
The government has so far been able to curb imports of goods, even though the country has officially lifted most import restrictions. If stagnant economic activity picks up to some extent, import bills will gradually rise. The government cannot afford to leave the economic wheels jammed, and import-driven demand for dollars can no longer be suppressed.
With energy and financial costs rising, it is unreasonable to expect exporters to see a significant increase in merchandise exports within the next few months. Increased remittances may also take longer to materialize, but a recent crackdown on illegal foreign exchange traders and some easing of political uncertainty will encourage overseas Pakistanis to repatriate more foreign currency. There is a possibility that it will become possible.
Bailouts for exporters in terms of energy subsidies and large interest rate subsidies are no longer possible due to IMF conditions.
But it might help at least some competitive exporters if the government could rein in borrowing from commercial banks and leave enough liquidity for the private sector. (According to the latest SBP figures, in the period from July 1 to August 25 this year, the federal government’s borrowings from banks doubled to Rs 1.65 trillion from Rs 871 billion in the same period last year).
However, with the inflation rate reaching 27.4% in August and rising electricity and gas prices in all sectors further increasing inflationary pressures, the central bank may have to raise its key policy rate again in mid-September. be. In that case, the reduction in government borrowing and the associated creation of room for banks to lend to the private sector will be of little use to the private sector.
The interim government has now decided to experiment with borrowing from the capital market. The government has decided to use these borrowings only for state-owned enterprises that require large capital injections for their survival and expected growth.
The success of this plan will depend on how capital market investors perceive the borrowing instruments employed (bonds, stocks, investment certificates) and the country’s general economic and investment environment. Determined by
Published in The Business and Finance Weekly Dawn on September 11, 2023
