Daily Times

Uncertainties and speculations regarding the loan package from International Monetary fund (IMF) have ended with the news of its approval, finally. First time came into power PTI government has paid a huge price in securing this package by taking some very unpopular decisions. While negotiating with IMF the government suffered a huge loss of its Finance Minister who is considered the brain of the party and the most trusted key player of Mr. Khan, The Chairman PTI and Prime Minister of Pakistan. The situation highlights the importance of said Package which seems predictably necessary not only for due debt repayments but to rescue Pakistan from an unhealthy fiscal management. In securing this package Government has taken some aggressive measures related to Exchange Rate, Interest Rate, Inflation and above all Taxation which is not only the wish list of IMF but considered as tools for correcting fiscal management system of Pakistan. A new financial team of experts is induced which apparently are determined towards achieving the targets assigned including documentation of economy. However, these measures have increased the cost of doing business which is reflecting in growth rate of the country that showing an economic slowdown. If this trend may have been continued for a longer duration, it will create a situation of Economic Shut Down. Free float of exchange rate results inflation if there may be shortage of Dollars in economy which is to be checked through increasing discount rate that translates into increase in cost of doing business. Now, when the country will observe a definite inflow of dollars aided by strict fiscal and monetary polices, the situation should be reversed accordingly.

A stable Rupee and availability of cheaper funds, or anyone from these two, can reduce the pressure on Industries heavily dependent on these twin input costs. If these twin input costs may not be controlled, the situation of slow-down of economy may result in a complete shutdown

Due to unpredictable exchange rate and variation, costing is getting difficult not only for import based industries but exporters as well. Importers have multiple options of international payments including spot payment method or on deferred payments basis. When Pak Rupee shows a stable trend, importer tries to avail deferred payment option which gives him a free of cost loan upto a limited time period. In times of devaluation spot payment basis is the best option for foreign payments however it doesn’t give extended time for payment not more than 5 days as prescribed in UCP 600 (Unified Custom Procedures 600). Importer then asks Bank to give loan on some mark up which bubbles up its finance cost along with already inflicted cost due to devaluation. On export side, due to unpredictable situation, buyer holds his orders to negotiate rate if further devaluation may occur. Unreasonably depreciated Pak Rupee is not in favor of even exporters which can get a gain in short run but in longer run it can hurt the going concern. This scenario is bringing inflation in the economy which will soon witness a double digit. The number is already almost doubled from last fiscal year i.e. it increased from 3.9% FY18 to 7.3% FY19. Rise in inflation is attributed to increase in energy cost due to devaluation which also includes revision in gas prices that means if this happens, State Bank of Pakistan (SBP) will increase its policy rate accordingly. It is expected that the policy rate will increase by some 75-100 basis points (BPS) to check the vertical trend of inflation. The situation can be explained in a statement that government is controlling twin deficit i.e. Current Account Deficit and Trade Deficit by increasing twin input costs i.e. through devaluation and interest rate hike.

Recently a data revealed about the performance of Large Scale Manufacturing Industries (LSM) which shows a decline of 3.51% during first ten months of current fiscal year as compared to corresponding period last year. Though the suffered LSMs are majorly import based industries having multinationals at their back like automobile, food-beverages-tobacco, petroleum products, pharmaceutical, chemicals, paper-boards and steel-iron products. Despite of 35% devaluation of currency, export based LSM i.e. Textile sector also showed a negative trend slightly due to heavily dependent on spinning sector which is not a potential value added product having huge international market. Performer LSMs are Fertilizers, electronics, leather products, engineering products, rubber products, and wood products. Overall performance of LSMs are deteriorating further with rise in twin input costs however there is an opportunity for those local industries who are producing import substitutions. As exporters could not performed neither in times of lowest cost of production nor in present times therefore the chances of growth of manufacturers producing import alternative are brighter. It will reduce the country’s import based trade deficit. Government needs to facilitate these local units to grow further while giving them cheaper credit facilities which are available to exporters together with increasing the performance of Quality Control Units to gain public trust in these goods. Increasing discount rate will definitely increase finance cost of these local manufacturers who are producing or capable of producing import substitutions which otherwise were forced to shut down when exchange rate was artificially controlled by inflicting external loans by previous regime.

Now as $6Billion Dollars IMF loan is approved for 39 months with an upfront payment of $1Billion Dollars it is expected that a further $38Billion Dollars will be available for Pakistan from external sources with IMF recommendations over the program period which is a good sign for the economy having huge external payments. It means on average a Billion Dollar per month maybe available for Government to finance its external payments. In previous regime, facility extended by IMF to Pakistan, no amount of additional funding from other sources as a consequence of IMF approval was specifically pointed out by the fund. Now with these expected inflows, the position of foreign reserves will be stable and it will definitely control Rupee depreciation. It is expected that the Rupee will further appreciated and take place around Rs.148-152 per dollar in near future. Meanwhile on the other side Mr. Shabar Zaidi is determined to achieve a huge target of tax collection while broadening the base of tax payers by taking strict measures for documentation of economy, inflation will come down after touching a 13% peak which should must result in decreasing policy rate accordingly. A stable Rupee and availability of cheaper funds, or anyone from these two, can reduce the pressure on Industries heavily dependent on these twin input costs. If these twin input costs may not be controlled, the situation of slow-down of economy may result in a complete shutdown.

The writer is Corporate a Specialist and a Chartered Banker (UK)