More Smoke Less Fire
By Sahibzada Riaz Noor
Pakistan

 

Although the acting Governor of the State Bank of Pakistan in a recent press briefing has explained that we are far from financial default on our sovereign debt — with the requirement of only $500 million to repay to commercial creditors in December 2022 — the clamor about defaulting has assumed more of a political blame game, which the government has failed to explain away by stating the factual position in terms of facts and statistics. Although no less serious, the foreign exchange crisis doesn’t foredoom imminent disaster through definite default and is more a problem of cash flows.

Pakistan’s debt is largely domestic in the shape of Rupees. This is about 67% of our total debt. In our external debt, the larger portion is owed to multilateral institutions like IMF, World Bank, Asian Development Bank, etc. The second portion of our external debt is owed to countries like China, Saudi Arabia, UAE, etc. Thirdly, is the debt loaned from foreign banks or private investors in the shape of foreign exchange bonds like Sukuk bonds, etc. This last is called the foreign commercial debt which is only about 17% of our total external debt. With regard to debt owed to international lenders, this is renegotiable as has often been the case in other economies as well.

The debt owed to bilateral countries is also rolled over as China and Saudi Arabia recently agreed to roll over their due repayments of nearly $4.2 billion — China’s $2.2 billion and Saudi Arabia’s $2 billion. During the current financial year, i.e., up to June 30, 2023, Pakistan is required to repay only about $3.2 billion to foreign commercial creditors. 63% of our debt is in Rupees owed to domestic banks and financial institutions, which can be repaid by money printing in case of a liquidity crunch, although this will have inflationary impacts. Only 17% of our debt is in dollars, owed to external commercial creditors. As recounted out above, our liabilities in terms of sovereign debt during the current year are roughly $3.2 billion whereas our expatriate remittances itself are around $3 billion per month. Our liquid foreign exchange reserves stand at $9.2 billion. Thus, it is essentially the sharp increase in recent months of oil and wheat prices — which have raised all commodity and food prices in the world market — that has caused the present dollar liquidity crisis in Pakistan.

This cash flow crisis in dollar terms means we are required to make large dollar payments immediately for unavoidable imports on oil, gas, edible oil, etc. whereas the available foreign exchange is barely sufficient. Outflows are just being matched by our dollar inflows from exports and remittances, and in case the situation doesn’t ease up, we may face immediate shortages, risking the collapse of supplies. But that predicament has not entered the door as yet. All eyes are on the IMF package restoration and inflows from other quarters expected but tied to this revival. That is the crux of our present dollar shortage crisis. As international oil and commodity prices fall due to recession in most major world economies and the IMF agreement comes on stream by August 2022, the pressure on our dollar will ease, raising the Rupee exchange rate. The recent agreement between Russia and Ukraine enabled through the aegis of UN and Turkey, under which 20 million tons of Ukraine wheat will be exported from Black Sea ports, will also ease the pressure on food prices around the world.

But why is the dollar price soaring so high versus the Pak Rupee these days? One can give three main reasons. The first and most obvious is imports are far in excess of exports. The second is the uncertainty created in the market by political rivalries between the government and the opposition, compounded by judicial decisions that are being challenged — all of which are impacting political uncertainty. The third is due to the increase in the rate of US dollar in the international market. There is also the presence of speculative purchases.

How has the increase in the rate of exchange of US dollar compared to other currencies come about? This has occurred mainly due to the increase made in interest rates by the US to contain unprecedently high inflation caused by Russo-Ukraine war supply disruptions, which in turn has led investors to divert capital towards US dollars since they can earn higher profits due to higher interest rates available on US securities. The Pak Rupee has lost about Rs12-15 per dollar due to this dollar rate appreciation. The Euro has fallen against the dollar from €0.98 to €1.2 for the first time since many years. Other world currencies have similarly fallen against the US dollar. The Indian Rupee has also taken a hit and the Indian Reserve Bank is planning to offload a few billion dollars into the market from its reserves to stem the hike in dollar rate compared to Indian Rupee.

Although there is no escape from making basic income and expenditure reforms so that such foreign exchange crisis does not recur periodically, there seems to be more smoke than real impending fire with regards to defaulting. The greater danger is from political instability.

Those making a comparison with Sri Lankan conditions and warning of a meltdown either do not take into account certain economic basics, are too opinionated, or are furthering a slanted agenda adding to confusion and uncertainty both in the market as well as among the people through press, social media and by gossip.

(The writer has served as Chief Secretary, K-P. He has an MA Hons from Oxford University and is the author of two books of English poetry The Dragonfly & Other Poems and Bibi Mubarika and Babur. The Express Tribune)