Pakistan’s external sector is in under serious trouble as the current account deficit has increased drastically. Due to this crisis, foreign exchange reserves of Pakistan have decreased to $13.85 billion as of September 29, 2017. The challenges to Pakistan’s external sector remain far from over.
The government was considering depreciating rupee by 9 percent. It was also considering Rs10 against US dollar or to increase the scope of 100 percent cash requirement before goods are imported. The Finance Ministry opposed this proposal on the grounds that rupee depreciation will increase the burden of external debt on the federal budget. The government did not want to compromise as it has already limited fiscal space. It opposed the 100 percent cash requirement alternative because the IMF raised objections when the move was previously used. This impact of both of both the polices can be negative on the external sector.
The expert and analysts were of the opinion that if rupee remains depreciated, as it is now, the import bill will remain high. In case if rupee is depreciated, burden of external debt in rupee terms will be a cause of concern.
The government was always for to increase tariffs. The National Tariff Commission (NTC) has already identified tariff lines of non-essential consumer goods on which it has proposed to increase duties by 30 percent. These goods include cosmetics, consumer goods, and agriculture products. As per NTC proposal, duties will be abolished completely on import of raw materials and other materials that are used in manufactured exports. Increasing tariffs on agriculture, cosmetics, and consumer goods cannot bring down Pakistan’s import payments in a congenial range.
The recent worsening in current account deficit has come on the back of increased imports of power and construction machinery under the China-Pakistan Economic Corridor (CPEC). Increasing tariffs on goods cannot bring any dramatic improvement in our current account.
Pakistan’s major agriculture imports include edible vegetable, oil seeds, fruits, coffee, tea, and spices. This may not reduce import bill by a large margin, but may decline the purchasing power of consumers who are poor and lower middle income since a significant portion of their income is spent on food items.
It is generally believed that a depreciated rupee will give a push to Pakistani exports. The IMF has continuously maintained that rupee is overvalued by at least 20 percent.
Survey of Pakistan 2016-17, Pakistan’s external debt is $58.4 billion. If the rupee is depreciated to Rs115 per dollar, the external debt goes down to $53.2 billion. It is observed that whenever a currency loses value either due to inflation or depreciation, the debtor gains and the creditor losses.
Depreciation may not be viewed favorably by long-term foreign investors since they prefer to invest in a currency in which their returns are secure. Rupee depreciation can be the only viable and effective policy option in line with market fundamentals. However, it will only bring temporary relief to our external sector crisis.
The fact that Pakistan is one of the few economies in the world, which repeatedly seeks help from the IMF for its external account crisis, needs serious attention.
Pakistan has always tried to stop this deficit either through more borrowing, remittances, or foreign direct investment or even privatization proceeds. When revenues are not coming Pakistan always turns to options like rupee depreciation, tariffs and cash requirements.
A permanent end to the external account crisis can only be achieved through increasing export earnings. Pakistan’s rupee declined the most in nine years. The rupee tumbled 3.1 percent to 108.095 per dollar at close of trading the lowest level since December 2013.
The International Monetary Fund last year pointed out that the currency which operates under a managed float regime was overvalued by as much as 20 percent and hurting its exports. This was also opined by our businessmen and economists.
The State Bank did the devaluation by allowing some import payments to be made through the interbank system. The move may help the nation curb a widening deficit and boost falling exports as present looks to contest national elections next year.
The rupee’s strength “was leading to a wider current account deficit and depreciation pressure on the currency,” said Divya Devesh, a Singapore-based Asia foreign-exchange strategist at Standard Chartered Plc. “We were forecasting a move toward 108 in USD-PKR by end-year.”
The IMF last month said economic stability reached under a three-year $6.6 billion loan program that ended last year has begun to erode.
Pakistan’s current account gap has more than doubled to $8.9 billion in 11 months ended May compared with $3.2 billion in the same period last year.
The “State Bank of Pakistan will continue to closely monitor the developments in the foreign exchange markets and stands ready to ensure stability in the financial markets,” the central bank said. Pakistan agrees to depreciate rupee post talks with IMF. This calculated move allowed the currency rate to touch Rs 110 to a dollar before settling down at around Rs 107 and did not go beyond official estimates.
Pakistan has agreed to allow the depreciation of rupee post talks with the International Monetary Fund (IMF) on the nation’s economy. Pakistan and an IMF delegation concluded the first round of discussions on the country’s economy. Now members of the IMF delegation and Pakistan team are taking a break to prepare for the policy-level wrap-up.
The State Bank of Pakistan (SBP) would now let the currency exchange rate to adjust to market conditions after many months, rather years, of resisting expectations.
The authorities believed the currency adjustment would help shift foreign currency holdings from commercial banks currently standing at a higher level of around $6 billion back to official reserves.
The timing of the move was planned for to ensure materialization of $2.5 billion worth of receipts from two international bonds launched last month. This calculated move allowed the currency rate to touch Rs 110 to a dollar before settling down at around Rs 107 and did not go beyond official estimates.
While the government team, led by secretary of finance Shahid Mehmood will review the assessment, the IMF mission to Pakistan, led by Harald Finger, will visit Lahore next week for talks with provincial authorities. Pakistan will continue to remain under the IMF’s post-programme monitoring (PPM) until about 2023 for borrowing significantly higher than its quota.