Uncertainty kills

Uncertainty plays havoc with the economy and in case it persists for long it poses potential risks that can deal irreparable blows to the economic front.The same is happening with Pakistan since Pakistan Tehreek-e-Insaf- (PTI) led government assumed power. Following July elections, the PTI formed government in the center, Punjab, and Khyber Pakhtunkhwa provinces, and a coalition government in Balochistan. While in Sindh, Pakistan People’s Party (PPP) came into power. In the last one year, the exchange rate depreciated by almost 40 percent but the way in which it nosedived this month when it fell by more than Rs14 in a single day on December 9, 2018, it was unprecedented in every way. Then the correction kicked in and the rupee stabilised against dollar within few hours and was now trading in the range of Rs140/dollar. One could argue that former finance minister Ishaq Dar kept rupee artificially stable for a longer period, but when Pakistan Muslim League-Nawaz (PML-N) came into power in 2013, they never allowed speculators to play with the fate of the economy. When the rupee nosedived against dollar Dar always came forward to warn speculators to avoid plunging into such practices, otherwise the law of the land would be moved against them. In December 2017, when the decision on exchange rate depreciation was taken during the PML-N-led regime, there were only four people in the loop including former PM Shahid Khaqan Abbasi, former advisor to PM on finance Miftah Ismail, Governor SBP Tariq Bajwa, and former finance secretary Shahid Mehmood so it was adjusted in accordance with the scheme carved out by the policymakers. But now dollarisation of economy continues unabated because of confusing signals being given out by the incumbent regime and publicly the exchange rate figure of Rs150/dollar or even higher was talked about, even published, and circulated at different levels. Many officials involved in holding parleys with the International Monetary Fund (IMF) told The News that the broader discussions on exchange rate were held but nothing of exact range had ever made part of any official document because these documents could be leaked to anyone and speculators could manage to make money out of this information. However, some unusual developments have been witnessed on economic front under the dispensation of PTI-led regime. It exposes capability and efficiency of the economic team. The lack of coordination is another hallmark of this regime and all these multiplying factors are causing innumerable losses on economic fronts. Although, there had been some good news like almost 50 percent gap on external front has been bridged with $6 billion deposits into central bank from Saudi Arabia and United Arab Emirates (UAE), the PTI-led government has failed to use these developments for mustering support and restoring confidence in the capability of the economic team to revive the economy.What are the reasons behind that much uncertainty on economic front? Before going into the details for ascertaining exact causes, first of all there is a need to analyse its potential outcome. A sudden currency devaluation must have be carried out on the basis of economic fundamentals, as at a time when the current account deficit was at a record high of $18 billion and foreign currency reserves were falling at the same time, the central bank was not in position to protect rupee through market intervention. This uncertainty triggered when the IMF mission visited Islamabad last month and both sides could not strike a staff-level agreement after two-week long parleys owing to differences on the pace of adjustments under a possible three-year program. Pakistani team argued that the financing gap on external front was bridged so there was no urgency for seeking IMF bailout package. During this period, Pakistan received two installments of worth $2 billion from Saudi Arabia and the now UAE has announced to deposit $3 billion in the central bank. China had already deposited $2 billion in July soon after general elections in Pakistan. Although, bilateral friendly countries have come forward to rescue Pakistan, they have also made it clear that their support must not be considered as an alternate to the IMF program rather it should be treated as compliment to it.Pakistani officials in background discussions stated they wanted to use the breathing space in the shape of bilateral aid as part of their strength to secure a better package from the IMF on easy terms and conditions. But this strategy has failed to deliver any good for the country because the uncertainty and confused signals have caused more losses than gains in recent months. Now the government faces two major challenges. First it will have to strike a staff-level agreement with the fund after mid of next month and the second it has to pass unscathed through from FATF’s plenary session meeting scheduled in Sydney from January 8 to 10, 2019. On the IMF front, Pakistan has submitted a draft of Memorandum of Economic and Financial Policies (MEFP) envisaging macroeconomic targets including devising a roadmap for curtailing twin deficits over the period of next three years. In a bid to avert balance of payment crisis, Pakistan has envisaged ambitious a projection for receiving $12 billion inflows from four major avenues including $6 billion in the shape of monetary authorisation deposits from Saudi Arabia and UAE and another $4 billion from unidentified avenues in the current fiscal year. According to plans, Pakistan prepared three year framework by envisaging its gross financing requirement standing at $21.452 billion for the current fiscal year 2018-19. They envisaged that this requirement would decrease in next two years hovering in the range of $17 billion per annum basis in fiscal year 2019-20 and 2020-2021. The external financing has been worked out by the Ministry of Finance in consultation with other relevant stakeholders and they projected $500 million from the IMF as so it demonstrates that the government will enter into a bailout program within the current fiscal year. Pakistan also projected $700 million through launch of international bond. Finance minister Asad Umar recently chaired meeting to explore options for launching Pakistan Diaspora Bond under “Pakistan Banao” scheme to attract $500 to $700 million from overseas Pakistanis. The government had estimated that the foreign currency reserves of the country would be standing at $14.856 billion by June 30, 2019. The government will have to pay $6.5 billion in the shape of amortisation of foreign loans and liabilities during the current fiscal year. The government has projected that China will provide $1.983 billion as bilateral loan during the current fiscal year. The major avenues of foreign financing have been identified as they projected $4 billion from unidentified avenues during the current fiscal year. There is expectation that China is going to provide another $2 billion within the current financial year so the government has projected total inflows of $4 billion in the shape of unidentified avenues as Chinese already deposited $2 billion earlier in July 2018.The second projected dollar inflow has been envisaged in the shape of Monetary Authorization Deposits to the tune of $6 billion during the ongoing FY2019. Saudi Arabia committed $3 billion for provision of oil on deferred payment and also promised $3 billion deposits for the State Bank of Pakistan (SBP) out of which $2 billion has already been provided to Pakistan and remaining $1 billion was expected to be received by next month. The UAE also announced same amount of package, while second provision of oil facility on deferred payment is expected to be announced next month.Despite placing this ambitious plan, the uncertainty will not end without striking a deal with the IMF but it must be done to protect the vulnerable and poor segments of the society.The writer is a staff member

from The News International - Money Matters http://bit.ly/2Lzg0Xl