Enough is enough! - Dr Ashfaque H Khan!
Economic experts within and outside Pakistan unanimously agree that the country's economy has never been in such a bad shape as it is today. Five years of economic mismanagement and poor governance by the previous regime have not only destroyed the economy of Pakistan but also severely weakened the key institutions of the country.
Even after the exit of the previous regime, Pakistan's economy continues to receive a 'stepmotherly' treatment. The caretaker government has failed thus far to appoint both a credible finance minister and a professional economic team to address the extraordinary challenges confronting the country on the economic front. The debt repayment crisis is looming large and no one who matters in this country is bothered. It is frightening for those who know exactly what is going on and what is in store for the country. Others are taking this as business as usual.
Let me dwell on what is in store for the country. The foreign exchange reserves of the SBP are depleting fast and have already plummeted to a dangerously low level. In the last ten months (since July 2012), the SBP has lost $4.1 billion in its reserves and $1.164 billion only in the last five weeks, that is, it is down from $7.861 billion on March 1 to $6.697 billion on April 5. The country will have to retire $0.838 billion of IMF loans during the period until June 30.
With little or no chance of sufficient external inflows in the absence of the IMF programme, the SBP's reserves are likely to fall further to $5.859 billion by end-June 2013. We must not forget that the SBP has borrowed $2.325 billion from commercial banks in the forward market. Adjusting for this purchase, the SBP's reserves would stand at $3.534 billion by end-June – sufficient to trigger a crisis of confidence.
Where are we taking this country? Why is everybody a silent spectator? Is this the way we want to take this 180 million people strong nuclear power forward? No sir! Enough is enough. Brotherly and friendly countries including the international financial institutions are nervously watching our decay. Many of them have expressed their views in recent weeks. No one will come forward to bail us out until we realise that we are in a deep crisis and make efforts to set our house in order.
The SBP is bent upon misguiding the people by releasing dated reports. It has released two quarterly reports simultaneously in mid-April 2013, covering the period of July-December 2012.Much water has passed under the bridge during the last four months.
The external balance of payments is in a highly precarious condition today than it was some four months ago. Reading the report, ordinary people will get a not-so-frightening message but those who follow the economy of Pakistan will consider the reports as a deliberate attempt to misguide the people at large and those who matter in particular.
The SBP's reserves are at a dangerously low level and in the absence of substantial inflows, they will reach a point by end-June 2013 when Pakistan will face serious difficulties in honouring its external debt obligations. What will happen then?
First, the rupee will come under severe pressure. The SBP has been aggressively intervening in the market to prevent a free fall in the exchange rate, and in the process has lost substantial reserves. With such a low level of reserves in hand, it will have no luxury to intervene in the market to protect the exchange rate from going forward. Sharp depreciation of the rupee is in store with all its adverse consequences for the economy and people at large.
Second, if Pakistan defaults in its single debt payment the chances of which are strong, its L/C (letter of credit) will not be honoured. It will be able to import only to the extent that it has cash dollar to pay for. We may expect substantial cuts in imports including POL products. In turn, massive cuts in imports will adversely affect economic activity.
Third, a slowdown in economic activity and massive cut in imports will reduce tax collection. Expenditure will have to be cut down drastically to keep the budget deficit at a manageable level. If we fail to drastically cut expenditure, budget deficit will be high and its financing would come from domestic sources alone – perhaps mostly from the SBP, with all its inflationary consequences. As the common man experiences the adverse economic consequences of these events, there is sure to be social unrest.
The country will be forced to impose exchange control and will not allow foreign exchange to go out of the country. A crisis of confidence will be set in motion. All this is likely to happen soon, particularly at a time when the country is in the grip of election campaigns and there is no credible economic team in place.
Enough is enough. This is not the way a country can be governed. This is nothing but a mockery of the country. My recommendations are as follows. Put in place a credible finance minister and a professional economic team without wasting time. Take the economy seriously before it is too late. Immediately start negotiations with the IMF for a bailout programme. Appoint an 'educated' finance minister to lead the Pakistani delegation at the spring meeting of the IMF-World Bank. Add some professional economists in the team to assist the finance minister in his parley with the IMF. We are in a crisis. No one will come forward to bail us out unless we become serious on the economic front.
