Since the removal of the peg against the dollar, the rupee slid rapidly to find a more realistic value in the currency market and has even regained some lost ground since. From a low of 276.50 last month, currently it is hovering in the 260-261 range. This relative strength however is temporary. After much dillydallying by the PML-N, the undeniable reality of needing the IMF’s help was accepted, much to the detriment of an already collapsing economy. While some of the more immediate measures such as energy and fuel price hikes have already been taken, the next step is likely to be the removal of the curbs on import. The SBP in tandem with the Finance Ministry has been instructing banks to either refuse the opening of import LCs or delay their retirements to save foreign exchange reserves. This has led to the current account deficit shrinking significantly, down 90.2 percent year-on-year in January to just $0.24 billion.
This practice extended over to avoiding paying foreign companies their dues that have to be remitted outwards. Major players such as Emirates and most recently DHL have resultantly scaled back their operations, something that is bound to impact individual and business customers alike. Once the Fund forces the government’s hand to allow regular trading activity to continue through banks, a sizeable volume of backlogged imports will be cleared very rapidly that will most certainly put pressure on the rupee. While there are no restrictions on exports, the fact that many exporters rely on imported raw material for their products, means they too have been unable to operate at capacity. Additionally, an international economic recession has hit demand as well.
Additionally, businesses, like households, have had to contend with record inflation as well. Apart from high operating costs, long term financing costs have skyrocketed owing to aggressive monetary policy tightening. What is more, the SBP is set to announce another MPS tomorrow, two weeks in advance, with an expected hike of 200 basis points in the discount rate. An economic crisis of this magnitude has surely exposed a stark reality facing the economy; Pakistan does not really make anything. Most of our industry is based on conversion of raw material into products. This is exactly why even the smallest shocks to the economy hit businesses hard as the structure it is built upon is simply unsustainable. A combination of decades-old bad economic policies favoring a few select industries has led to a position where Pakistan consistently remains one of the worst performing economies and markets in the world. All stakeholders, but primarily policymakers, must first accept certain realities before and let those direct the measures they take when repairing the damage that has been done.
