The system is shaking again. Pressure is mounting and getting too comfortable with the current episode of economic stability could prove to be a costly mistake. Consider a few data points from the recent past.
Start with: Recently, the Finance Minister as well as the State Bank Governor have issued public assurances that the country’s foreign exchange reserves are comfortable and steadily growing. And of course they are not wrong in saying so.
Reports say that SBP has bought up to $9 billion from the open market to boost its reserves. Despite the surge in imports and this buying by the State Bank, the value of the dollar is more or less stable, and its availability in the open market is also healthy. Rollovers of maturing obligations by China and, more recently, the United Arab Emirates, have gone smoothly.
On the face of it, the external account looks healthy, so why is the government still taking expensive loans from commercial banks?
In December, it was reported that they had taken a $300 million commercial loan from a Pakistani bank that raised funds from Gulf sources. These loans were taken at an interest rate of more than seven percent. Now the Finance Minister tells us that he is going to borrow another billion dollars from two Middle Eastern banks at an interest rate of six to seven percent. The term will be one year.
The State Bank governor told us in August that he plans to raise $4 billion this fiscal year in commercial loans, so we’re nowhere near the end of that plan. If these loans are necessary to support the budget or to meet external financing needs, they are evidence of the shaky foundations on which the present-day stability rests.
The external account looks healthy, so why is the state taking expensive loans from commercial banks?
In other news, Deputy Prime Minister Ishaq Dar convened a meeting to review ways of reducing electricity rates. This comes literally weeks after the government announced a realignment of electricity rates with private power producers and promised a dramatic reduction in the price of electricity as a result.
And the business community is once again raising its voice to reduce the “cost of doing business” to sustain export growth, with the upcoming Strategic Trade Policy Framework (STPF) and in textiles and apparel. More concrete steps should be taken. The policy according to a press release issued by the Karachi Chamber of Commerce on Tuesday.
The statement had many good points, such as a call from Pakistan Hosiery Manufacturers Association (PHMA) Central Chairman Babar Khan, that the government should ensure that the country “lives up to its international commitments, especially not compromise its obligations under the Convention on Human Rights and all other conventions to which the country is a signatory.
It is good that the business community can see its interests aligned with the promotion of human rights in the country, if only because of the need to maintain Pakistan’s GSP Plus status with the EU.
After making this point, Mr. Khan turned to more traditional topics, lamenting the “gas, electricity and water crises, as well as high tariffs that have increased the cost of doing business and forced Pakistani products to be imported locally.” and has made the markets uncompetitive at the international level.”
There were no specifics in that particular statement, but in the past the language has always referred to preferential electricity and gas rates for the textile industry.
Also, a few days later another statement came from the Sialkot Chamber of Commerce and Industry, demanding preferential treatment for the housing and construction sectors as they are the “backbone of the economy”. It had plenty of details, including three separate tax breaks on property transactions and the idea of introducing a “10-year fixed-rate mortgage product linked to PIB bond yields” to make housing more affordable. The latter idea can certainly be explored (if it isn’t already) but it boggles the mind how one can expect tax breaks for property developers at a time when the state now It is trying to make up for a revenue shortfall of over Rs 400bn.
In another interesting development, the Prime Minister was completely unimpressed in his meeting with the FBR officials.
He refused to give another mini-budget, and he told the assembled officials to work harder to meet their goals rather than asking for more taxes to squeeze taxpayers. And then he reminded them that he had already approved a salary increase as well as new vehicles for them, for which funds had been released, so they would at least pay for these benefits. Kim can raise the revenue his government needs.
Beneath the surface, trouble is brewing. While the finance team is scrambling to arrange the resources needed just to keep the external sector afloat, the old anxieties that lead to restlessness and impatience begin to manifest themselves once again. Angry exchanges between the Prime Minister and his tax officials, high-level meetings to seek “relief”, sad statements from the industry about the “cost of doing business” or high incidence of taxation on their respective sectors, it All come together to increase the pressure for each other. Definitely some kind of radical change.
But of course change is something the government cannot afford. “Let it be clear to all,” the finance minister told his colleagues in Parliament just a fortnight ago, “no matter how much pressure is put on me, I will not accelerate economic growth.”
These are the right words for the occasion. But even more important is the right path from here. Over time the pressure will build and business leaders will weigh in on people far above the station of the finance minister with outlandish ideas that promise extraordinary results in the short term and do much harm along the way. It is important that he seizes the conversation, and advances some of the practical ideas that dominate the headlines.
The author is a business and economic journalist.
khurram.husain@gmail.com
Published in Dawn, January 23, 2025.
