Economic bleeding
ISLAMABAD: The ongoing crackdown of law enforcement agencies against the hoarding and smuggling of the US dollar and essential commodities especially sugar and flour has yielded much-awaited positive results. The crackdown has reversed a consistent economic bleeding and revived hopes of gradual economic recovery.
Resultantly, once the mighty currency, the US dollar has declined to 286 rupees in the open market, from 333 rupees before the launching of the crackdown in September this year. It shows a serious blow to the dollar as it lost about 47 rupees value in less than a month after crackdowns. Similarly, in inter-bank trading, the greenback has descended to 285.70 rupees (by Oct 3), from 307 rupees when the government decided to kick-start a nationwide action against the notorious hoarders and smugglers. So far, the US dollar has shed 22 rupees value against Pakistani rupee in inter-bank trading.
Crackdown against smugglers and hoarders has reversed economic bleeding.
Every day, the greenback is plunging against the PKR mainly because of the crackdown. The evil forces in the market that used to propagate artificial hikes in the worth of the dollar have been sidelined after seeing the entry of law enforcers. Now, the analysts are talking about the real value of the dollar around 250 to 260 rupees. Nevertheless, this will solely depend on the government’s action against the hoarders and smugglers. Before the beginning of the crackdown, the greenback was bashing the economy daily and igniting frustration among the masses in addition to triggering inflation. In Pakistan, the value of the dollar matters a lot as the country is dependent on imports of essential consumer items such as petroleum products, gas, edible oil, ghee, tea, and many other consumer items.
Economic bleeding was causing a consistent price hike in Pakistan.
Like the dollar, the value of sugar, flour, poultry chicken, and eggs has also declined in recent days as manipulators in the market have given up extortion of consumers in the name of artificial price-hike. Poultry chicken price in Islamabad has fallen to 560 rupees/kg (meat), from 800 rupees when the government initiated a nationwide crackdown. Similarly, the prices of eggs and flour have also declined after hitting a record-high level in September 2023. It is the first time that the retail price of eggs hit the 300 rupees mark in the summer season because of the exploitative approach of the market forces.
Additionally, the interim government has reduced domestic oil prices _ Petrol Rs 8 per liter and diesel Rs 11 per liter from October 1, 2023, in the wake of a decline in the value of the dollar. This minor decrease in oil prices did not impress the consumers as the government jacked up LPG and electricity rates, practically taking away relief from the masses.
Another important problem is that despite a decline in the value of the dollar, the interim government would not be able to give relief to consumers in the electricity and gas prices. The government has linked a hike in power and gas tariffs with the IMF program. However, in a recent meeting between the caretaker Prime Minister Kakar and the IMF managing director in New York, the IMF chief again asked Pakistan to tax the rich and give relief to the poor.
Like the IMF chief, former finance minister Miftah Ismail has also asked the government to tax the elite class to save Pakistan from destruction.
Former finance minister Miftah Ismail emphasized that the nation’s survival hinges on taxing the elite class. Miftah argued that fiscal challenges cannot be resolved unless the wealthy are subjected to taxation. He recommended that the government reduce expenses as a means to bolster the economy. He said that taxing the existing taxpayers would not serve the purpose. Hence, the government should target the elite class to enhance tax collection, he added. Ismail pointed out that the impact of a 31% inflation rate has not only adversely affected the middle class but has also begun to impact the upper class.
He criticized the government’s delayed decision-making, stating that in 2017, taxes on salaried individuals were raised by 15. It led to the current collection of 261 billion from salaried individuals, compared to a mere 61 billion from major exporters. Furthermore, Ismail noted that the government has not imposed property and agriculture taxes in the provinces. He also expressed opposition to taxing retailers and wholesalers.
Regarding relief for electricity consumers, he believed that the IMF would reject the relief proposal for 90% of power consumers using up to 400 units. He, nonetheless, supported the caretaker government’s decision to provide relief to consumers using 200 units. Ismail pointed out that the impact of a 40% inflation rate has not only adversely affected the middle class but has also begun to impact the upper class.
He criticized the government’s delayed decision-making, stating that in 2017, taxes on salaried individuals were raised by 15. It led to the current collection of 261 billion from salaried individuals, compared to a mere 61 billion from major exporters.
Stock Market Regaining Lost Momentum as economic bleeding reverses
The stock market maintained its upward momentum, extending gains from the previous day, as the benchmark KSE-100 index closed at 46,700 on Oct 3. The ongoing crackdown against smugglers and hoarders has revived investors’ confidence who were unhappy with a consistent rise in the value of the dollar. Investors remained upbeat, influenced by the positive market sentiment following the recent announcement of the general election date. The breach of the 46,700-point threshold by Oct 3. It appears an outcome of a reversal of economic bleeding.
Furthermore, over the course of the week, the KSE-100 index recorded a substantial gain of 667.63 points, equivalent to 1.46%. The strength of the KSE100 index was bolstered by sectors such as Power Generation and distribution, Commercial Banks, Oil and gas Exploration Companies, Investment Banks/Investment Companies/Securities Companies, and Pharmaceuticals.
Current Account Deficit Shrinks in August 2023
In August, the current account deficit (CAD) saw a significant reduction of nearly 80 percent, decreasing to $160 million compared to July’s $775 million, despite the relaxation of import restrictions as part of an agreement with the International Monetary Fund (IMF). Data released by the State Bank on Sept 21 indicated that the CAD contracted by 54 percent to $935 million during the July-August period of FY24, down from $2.035 billion in the same period of the previous fiscal year.
A closer look at the data reveals that both exports and imports of goods experienced declines. Imports declined to $8.49 billion in the first two months of FY24, down from $11.457 billion in the same period of FY23. Meanwhile, exports of goods also decreased to $4.542 billion over the two months, compared to $4.951 billion in the corresponding period last year.
It is worth noting that the relaxation of import restrictions is expected to widen the trade gap, subsequently contributing to an increase in the current account deficit. Import restrictions played a pivotal role in reducing the CAD to $2.4 billion in FY23 from $17.5 billion in FY22. The government had to ease import restrictions by the IMF Stand-By Arrangements for $3 billion. However, banks still impose import restrictions in a different form, requiring letters of credit to be opened only after securing the necessary dollars. The government has set a target of $6 billion for the CAD in FY24.
Remittances Decline in August 2023
In August 2023, the inflow of remittances from overseas workers reached $2.1 billion, marking a 3.1% increase compared to the $2.03 billion recorded in July 2023, as per the latest data released by the State Bank of Pakistan. However, when viewed on a year-over-year basis, the monthly remittance inflow experienced a decline of 24%, standing at $2.7 billion in the same month of the previous year. Remittances sent by overseas workers hold significant importance in supporting Pakistan’s external accounts, stimulating economic activity within the country, and supplementing the disposable incomes of households that rely on remittances.
During the first two months of FY24 (July-August), a total of $4.1 billion in workers’ remittances flowed into the country. This reflects a YoY decline of 22%, equivalent to $1.13 billion, compared to the $5.3 billion recorded in the same period of FY23. Last month, the Economic Coordination Committee (ECC) of the Cabinet approved the SBP’s proposal to modify six incentives to enhance remittance inflow and promote the use of formal channels for remittances.
Conclusion
As the value of the dollar has dropped substantially in recent weeks in the wake of a nationwide crackdown, the people are demanding significant relief in the electricity, gas tariffs, and domestic petroleum prices. Like the IMF and the World Bank, the people of Pakistan are using social media platforms to influence the government to tax the rich instead of throwing the maximum burden of tax collection on the masses. To satisfy the inflation and price-hikes hit people, the caretaker government would have to address the concerns of the masses. Otherwise, the ongoing efforts of a nationwide crackdown against smugglers and hoarders will be meaningless for the people. The World Bank’s report claiming a 39 percent poverty rate in Pakistan must be an eye-opener for the interim government.
