Any delay in the expected inflows from Saudi Arabia and China may deepen the forex crisis.
Islamabad: SBP Governor Jameel Ahmed said in his 8th December podcast that less than 10pc of the country’s imports are currently subject to administrative controls. “All such restrictions are temporary and will be withdrawn gradually,” he reassured.
Meanwhile, macroeconomic indicators of the economy’s health continue to deteriorate. The economy remains engulfed with crises of all sorts. The imported onions, ginger, garlic and soybean remain stuck at the Karachi port because forex-starved banks are not retiring their import letters of credit.
The state of forex market remain unclear in the event of restrictions withdrawn. External financing gaps are too large and non-debt-creating forex inflows continue to fall. This year’s fiscal gap, according to the SBP chief is $33bn.
The country’s forex reserves are as low as equal to just five weeks of merchandise imports. The external debt servicing requirements for January-March 2022 are too high ($8.8bn, according to credible media reports). Any delay in the expected inflows from Saudi Arabia and China may deepen the forex crisis.
External financing gaps are getting wider as non-debt-creating forex inflows remain low. According to the Pakistan Bureau of Statistics, exports during July-November 2022 were down 3.5pc year-on-year to $11.932bn. Although imports shrank 20pc year-on-year during this period, still the import bill totaled $26.338bn.
The declining forex reserves keep the government and the central bank extremely worried about the declining forex reserves. Pakistan has asked Saudi Arabia for immediate $3bn cash support to help the country meet external financing requirements in the next quarter.
Pakistan has sought even larger debt rollovers from China, and the government hopes Beijing will not disappoint. The International Monetary Fund (IMF) is yet to conduct the ninth review of Pakistan’s economy before releasing the next tranche of $1.2bn. It is yet to be seen how soon China and Saudi Arabia will respond to Pakistan’s request
Pakistan Railways is not able to finance imports of Chinese coaches also due to short foreign exchange. Even the Ministry of Defence has also been advised to check forex availability before importing defence equipment.
The business confidence in Pakistan fell to minus 4pc. While it was low at 17pc already in the previous but it was still positive. The OICCI says the decline in business confidence is not surprising “considering the highly challenging political and economic situation.”
All this makes sense when we look at the State Bank of Pakistan’s (SBP) fast-depleting forex reserves.
At the end of March 2022, the SBP’s reserves stood at $11.425bn, but they gradually tanked to an almost four-year low of $6.715bn on 2nd December. A massive decline of $4.71bn or more than 41pc in a little over eight months — mainly due to external debt payments — has compelled the SBP to restrict all delay-able forex outflows.The resultant trade deficit of $14.406bn remains too big.
Efforts are also underway to secure an additional $1.2bn from Riyadh in an oil import facility. The Kingdom recently rolled over a $3bn deposit previously placed with the SBP. Authorities hope that Saudi Arabia will also accept Islamabad’s request for $3bn cash deposits and another $1.2bn oil payment facility.
Since the beginning of April 2022, the rupee has lost more than 22pc value against the US dollar. At the end of March, the rupee stood at 183.48 to $1. On 9th December 2022, it closed at 224.40.
Importers and all others who need foreign exchange from banks complain that banks demand much higher prices for the dollar than the ones reported by the central bank at the day’s end (as mark-to-market revaluation exchange rates).
At the root of our continued external borrowing is the ever-growing fiscal deficit problem. Eventually its our ruling class that needs to learn to live within our means and become economically productive and efficient.