Desperate times

The global shutdown, being inescapable, poses serious consequences for the economies, especially of developing countries. It may have a crippling effect on Pakistan’s economy, which was already in the ICU before the outbreak of the coronavirus. The SBP’s actual reserves as of now are just $3-4 billion, exclusive of deposits from friendly countries and oil credit facility from Saudi Arabia. This works out to less than 30 days of imports. If the outflow of hot money exacerbates, the reserves may decline to $1-2 billion, a near-insolvency situation. With critically low reserves, the government is unable to take advantage of hedging fuel and other commodities after prices have nosedived. Pakistan’s exports are on hold while remittances are going to nosedive. Reduced pressure owing to weak demand for electricity and gas may cripple the transmission system. The circular debt is expected to go up from reduced power utilization. Reduction in LNG cargoes from Qatar would entail capacity charges for the LNG terminal. The FBR’s revenue collection show a steep fall in March 2020 and the decline may accelerate in the coming weeks. The country may face a loss of 4-5 percent of its GDP. The government’s economic team, unfortunately, only specializes in managing borrowings from international lenders to keep the economy afloat. Piling up debts does not address key challenges; rather it prolongs the agony and delays mitigating steps.

Under the present situation, the exchange control policy must be driven by the Ministry of finance instead of leaving it to the SBP. All dollar inflows must come to the SBP and outflows channeled through it. LCs should be opened with the prior clearance by the SBP to prioritize payments and conserve dollars. Imports of luxury and unnecessary items must be banned altogether for two years. Once the borders open, trade with India, Iran and Afghanistan, including transit trade, must be conducted at government level to eliminate massive smuggling. The Trading Corporation of Pakistan (TCP) at one time played a key role in facilitating imports and exports. We need to look for new ideas and smart solutions. These are desperate times and require desperate measures, even draconian, to mitigate the spread of the pain going forward. A comprehensive rescue plan by eminent economists is needed before the economy crashes.

Shoaib A Majeed

Karachi