IMF package
THE IMF decision to send its mission to Pakistan next week to discuss the resumption of its stalled bailout package should clear uncertainty and mitigate the risk of a sovereign default that appeared imminent with foreign exchange reserves lately dropping to just $3.6bn.
That the Fund is sending its officials to conclude the discussions on the pending review of the programme after three months and only after the State Bank lifted the administrative restrictions on the exchange rate to let the rupee discover its market value against the dollar shows that the government is unlikely to win any significant relaxations from it.
While it is crucial to seek immediate IMF funding to shore up its reserves, the government shouldn’t focus only on short-term relief.
The current loan package is set to end on June 30, and if there’s no new snag, we will get up to $3bn in funding from the lender. This may take care of our immediate balance-of-payments needs but will not be sufficient to cope with a similar payments crisis the next fiscal year and beyond. It is, therefore, advisable that the government seek to increase the size of IMF funding and the programme, and extend its duration.
There is a kind of ‘national consensus’ on the need for IMF dollars for stabilising the economy and boosting foreign currency reserves.
In the last three months, even friendly countries have made it increasingly clear that they are ready to help us only if we follow the IMF path. With former PM Imran Khan also having lent his support to a deal with the Fund, the government doesn’t have to fret about opposition to such a plan.
The extended loan period will not only ensure that bilateral and multilateral funds keep flowing beyond the term of the present political set-up but will also enable the next government to carry on with the reforms without a break or going back to the Fund for a fresh package.
As pointed out multiple times before, the IMF is no panacea for our economic problems. An IMF programme can at best provide space for executing deep structural reforms needed to correct course and put the teetering economy on a sustainable growth path.
Indeed, the free float of the home currency to be followed by implementation of the strict programme conditions that requires a large increase in energy prices and taxes will result in hyperinflation in the country.
With the rich having the knack of finding a way around the negative impact of such adjustments, the bulk of the price — like in the past — will have to be paid by common Pakistanis. While street riots are only a small possibility at this point, these may soon become a reality should the ruling elite again fail the people.
Published in Dawn, January 28th, 2023
Dar unpegged
IT is over. Nearly four months after Ishaq Dar descended on the cash-strapped economy with some decidedly outlandish plans — plans which seemingly centred on staring down one of Pakistan’s most powerful creditors — his humbling is complete. Unable to continue artificially suppressing dollar demand amidst drying up inflows, the authorities surrendered this week. With the collapse of the so-called ‘Dar peg’, the dollar-rupee exchange rate whiplashed to new highs on Thursday. The unprecedented volatility was a punch in the gut to market participants, who were seemingly caught unawares. Currency dealers complained of a lack of coordination between the finance ministry and the central bank while the chaos unfolded, and the dollar appreciated in both absolute and percentage terms at a level unprecedented since the new exchange rate mechanism was introduced in 1999, according to observers. To top it off, the finance minister, who should have displayed more responsibility, was nowhere to be seen while his single biggest policy decision was being undone.
The knock-on effects of the dollar’s sudden rise on already red-hot inflation will soon follow. All imported items have suddenly gotten a lot more expensive, including various food items, petrol and diesel. Raw material imports for local industries have also become dearer, and the cost increases will invariably be passed on to customers. The State Bank will be under pressure to increase interest rates again at its next policy meeting to grapple with this new round of inflation. The cost of doing business will consequently rise. These adjustments would not have been as sudden and painful had the government simply continued on the path Mr Dar’s predecessor set. Given time, markets would have adjusted by now and in a more tolerable manner than they will in the next few weeks. Had the PML-N’s London leadership not intervened and sought to prevail by imposing Mr Dar on Islamabad, the country may have been spared the inflationary wrecking ball now swinging its way. Alas, we can only hope that Mr Dar’s magic show is now over. His last act should be to quietly disappear from Q Block altogether. No amount of blaming the previous government or the historical mismanagement of the economy will absolve him of blame for the damage he has wreaked and the misery he has guaranteed for the people in what should be his last stint as finance minister.
Published in Dawn, January 28th, 2023
Lurking hazards
OVERSIGHT of illegal industrial activity occurring within residential areas in the country is weak, especially in poorer areas. However, this criminal negligence can have deadly effects, especially for those unfortunate enough to live near these risky operations, as a spate of recent deaths in Karachi has shown. According to reports, at least 18 people — mostly children — have died over the past two weeks, apparently due to inhaling toxic gas emanating from industrial units unlawfully set up within residential neighbourhoods in the city’s Keamari district. Health officials say the suspicious deaths occurred after the factories were set up, while locals complained of noxious fumes in the air. Sadly, it is feared the death toll may rise after further details are gathered.
This tragedy occurred in peripheral areas of the metropolis, but such ramshackle industrial operations, with little to no safety checks, can be found dotted across Karachi. In fact, even in supposedly middle-class areas of the city, warehouses and godowns have discretely opened up in what are supposed to be residential neighbourhoods. Hazardous material is often manufactured and stored in such premises. This is not the first incident of its kind and, unless the authorities take action, it will not be the last. All responsible for the tragedy in Keamari must be made to answer, including the local police and administration, as well as errant industries and environment departments. They must be asked how enterprises dealing in hazardous material were operating under their noses in a residential locality. The sad truth is that even the formal sector is poorly regulated in Pakistan; what occurs in the informal sector, in factories and warehouses illegally opened up in congested neighbourhoods, is the stuff of nightmares. Unfortunately, life is cheap in Pakistan, especially if the victims are poor and marginalised, and after initial outrage such tragedies are forgotten. In order to change the status quo, the state needs to eliminate hazardous industries in residential areas.
Published in Dawn, January 28th, 2023