Foreign exchange crisis is the real crisis
WHERE is the economic crisis? The PTI claims that the economy grew by 5.97 percent as opposed to a target of 4.8 percent. Where is the economic crisis? The PTI claims that the agriculture sector grew by 4.4 percent.
Where is the economic crisis? The PTI claims that the industrial sector grew by 7.19 percent. Where is the economic crisis? The PTI claims that the services sector grew by 6.19 percent.
Yes, all of PTI’s claims are true-and are now part of Pakistan Economic Survey 2021-22. Then where is the real economic crisis? The real economic crisis is the ‘Balance-of-payment crisis’, in technical terms, and ‘foreign exchange crisis’ in layman’s terms. Technically, a balance-of-payment crisis “occurs when a nation is unable to pay for essential imports or service its external debt repayment.” That’s exactly where Pakistan is right now-not being able to pay for essential imports or service its external debt repayments. A ‘foreign exchange crisis’ in our case simply means that the State Bank of Pakistan (SBP) has run out of dollars.
The fact is that the Pakistani rupee is being hammered down like never before. What really is going on? We must make a distinction between a ‘disease’ and its ‘symptoms’.
The hammering down of the Pakistani rupee is a ‘symptom’ not a ‘disease’. The real ‘disease’ behind the hammering down of the Pakistani rupee is the ‘foreign exchange crisis’. As of June 10, SBP had liquid foreign exchange reserves of $8.9 billion.
If we take out $4 billion worth of gold SBP is left with $4.9 billion, 24 days worth of import cover. Pakistan has to make a payment of $4.2 billion within the next 90 days and a colossal $31 billion in the next 360 days. On June 17, forward premiums in dollar swaps in the interbank market went into the negative.
What that means is that banks were facing a serious shortage of dollars. In essence, SBP is fast running out of dollars and banks have no dollars left.
In August 2021, SBP had liquid foreign exchange reserves of $20 billion. On April 11, the day Mian Muhammad Shehbaz Sharif took oath of the prime ministerial office, SBP was left with $10.4 billion, a drop of $10 billion in 8 months. Between August 2021 and April 2022 there’s been a serious capital flow reversal-and this is the real economic crisis we are in.
When a country goes into a balance-of-payment crisis the domestic currency takes a hit. When the local currency drops all imports become expensive.
When imports become expensive the rate of inflation goes up. When the rate of inflation goes up the purchasing power goes down. And when the purchasing power goes down poverty and crime go up. That’s a vicious cycle.
Where did PTI go wrong? This year, for instance, our imports may hit $75 billion while imports are stuck at around $31 billion and remittances around $28 billion.
That leaves a balance of $16 billion plus $15 billion as debt repayment to be financed. That’s absolutely not sustainable.
The fact is that PTI’s economic policies over the past four years have led us into a balance-of-payment crisis; the real ‘disease’.
The other fact is that a symptom of that ‘disease’-the Pakistani rupee’s nose dive-is now beginning to show up its ugly face.
The only way out of this vicious balance-of-payment crisis is a massive outside dollar injection-from the IMF, China or Saudi Arabia.
There’s no other way out. In essence, economic policies of the past four years have really enslaved us to outside dollar injections-or we become another Sri Lanka.