High economic demand during commodity super cycle resulted in high current account deficit in Pakistan. The foreign reserves are depleting fast. Foreign funding avenues will remain dry till the International Monetary Fund (IMF) board’s approval.
State Bank of Pakistan (SBP) has almost stopped intervening in the interbank market, although the Pakistan rupee is taking a severe beating amid growing political uncertainty. It is important to note that the government was already expecting this scenario as it hurriedly banned a number of imports in May.
However, these notional bans had a minimal impact on the overall size of imports as June import bill was at $7.5 billion. The majority of Pakistani imports are essential energy, food and raw materials. Not much to gain from banning the so-called luxury items, which can easily be smuggled into the country. Plus, a blanket ban on certain items can create market distortions an unintended consequence.
That is why the IMF does not like such bans and there’s little benefit of it. Now the government is thinking of lifting these bans (however, after these lines were written, the Economic Coordination Committee (ECC) of the Cabinet yesterday decided to lift ban on import of all items except completely built units (CBUs) of auto, mobile, and home appliances). One of the reasons for doing this is a slowdown in the imports in the current month. As per Finance Minister Miftah’s tweet, imports in July till 25th were of $3.76 billion. This figure shows a sharp reduction from the previous month’s.
There are two broad reasons for this decline. One is that high petroleum products and crude were imported in May and June. There is around 2 month inventory in case of diesel and the inventory of other products is quite high as well. Then the demand fell due to an increase in prices. Thus, the impact of energy imports is far less in July.
Then the SBP in informal consultations with the finance minister is keeping a check on imports as Letters of Credit (LCs) against many a product are denied or delayed. There are informal quotas of imports for automobiles and mobile phones in CKD form. All these factors have resulted in a significant slowdown of imports.
Unfortunately, however, the damage is already done. The highest volumes of petroleum were imported at peak prices in May and June. The LNG cargoes at spot were purchased at record rates. Prime Minister (PM) Shehbaz Sharif wanted to end electricity load-shedding while at the same time his finance minister, Miftah Ismail, was trying everything under the rules to lower the import bill. There were divergent approaches to economic challenges.
Ultimately, and expectedly, the prime minister had his way by banning trivial items while pushing for high energy imports in an attempt to end planned power outages. The planned power outages, however, did not end while the ban on the so-called luxury items did not make much of a dent in the import bill, while high energy imports continue to haunt.
The LCs for these imports in May and June are being negotiated now, and due to shortage of dollars, the currency is in a virtual freefall with SBP precluded from feeding dollars to commercial banks for oil imports from its reserves for obvious reasons.
SBP and Finance Minister are claiming that bad days are over. They are, in fact, working harder to restore the market confidence. Unfortunately, however, nothing is working. And in the backdrop, due to a ban on imports, many industries are working at suboptimal levels. For example, automobile and smart phone manufacturers are operating at 50 percent or less capacity.
The bottom line, however, remains the approval of the IMF board and the release of tranche from the Fund. As a prior condition, the government still has to raise around 4 billion dollars from friendly countries in various shapes and forms before the IMF board’s meeting. Unless all these ‘achievements’ are made the finance minister or the acting governor of SBP will not be able to placate the market with promises.
