Economic buoyancy

The stars finally seem to be aligning for Pakistan’s economy following three-odd years of mismanagement by the previous PTI government, which in turn came in the wake of decades of neglect by all rulers. The local currency jumped by a historic Rs9.58 per dollar in the interbank market, registering a 4.19 per cent appreciation against the greenback. The rally was even more impressive in the open market with the greenback trading at Rs230, losing Rs15 from the open market high of Rs245. The stocks chimed in with an equally impressive rally. The benchmark index gained over 2 per cent. The global bond market responded right on cue, with yields on all Pakistani bond issues down by 30 to 410 basis points on August 3 from yields reported a day earlier. Yields on Pakistani bonds maturing this year fell by 340 bps to 43.7 per cent, while bonds maturing in 2024 declined by 410 bps to 41.8 per cent. This is a healthy trend.

The rupee’s historic rebound began after Finance Minister Dr Miftah Ismail, flanked by the SBP acting head, asserted the economy’s strong fundamentals, and signalled the authorities’ readiness to intervene in favour of the rupee if the need arose. He also announced that Pakistan had delivered on all the prior actions to qualify for the revival of a stalled bailout from the IMF. The Fund’s country representative dropped a terse note confirming the government’s assertion, giving the markets further reason to be optimistic. This was also an endorsement of positive signals already emanating from Washington DC, demonstrating that perhaps COAS Gen Qamar Javed Bajwa’s telephone diplomacy was not in vain. A third factor contributing to this buoyant mood were encouraging trade numbers, indicating that the measures the government undertook to dampen imports are working. Latest data published by the Pakistan Bureau of Statistics (PBS), showed the country’s merchandise trade deficit for July 2022 tallied at $2.64 billion, down by 46.77 per cent month-on-month. This healthy tapering of the trade deficit was helped primarily by a 38 per cent fall in imports month-on-month, taking some pressure off the rupee.

But the greatest boost of all seems to have come from the ECP's verdict in the prohibited funding case. Earlier in July, we saw the markets react negatively after Imran Khan’s political alliance took over Punjab. Now that the ECP ruling has taken the sting out of that threat, the markets promptly cut their perception of political risk, rebounding on fundamentals. These are all good omens, but this is no time to be complacent. For one thing, there is the task of lining up financing commitments from other sources. The authorities are already in touch with friendly countries like China, Saudi Arabia, and the UAE, all of whom are said to be amenable to helping Pakistan out. However, a tentative understanding is not the same as a written commitment to chip in with hard currency injections, which is what the IMF appears to be insisting on. There is nothing on the horizon to suggest Pakistan cannot secure those commitments. Time, however, is of the essence. The news of Pakistan having these commitments secured should break any moment now, enabling Pakistan to send the Letter of Intent to the IMF in time for its executive board meeting in late August.

Equally important, the political leadership of the country would do well to keep political risk in check by ensuring there are no street protests or shutdowns. Political risk can still throw a spanner in the works, and the importance of mitigating it cannot be overemphasized. The finance minister and his team must not take their eye off the ball once the IMF’s Extended Fund Facility (EFF) is back on track. In fact, that would mark the beginning of their real task: Pushing ahead with the much-needed structural reform to remove the systemic distortions that have bedevilled our economy for decades now. The temptation to declare victory at such a juncture and return to political expediencies, will not be easy to resist, especially for a political government moving into election year. The pressure from within the PDM coalition to recoup some of the political capital burnt while averting default on the country’s external obligations may also come into play.

Prime Minister Shehbaz Sharif and his cabinet colleagues just learnt the hard way the importance of building trust with our multilateral and bilateral lenders as well as with domestic markets. That lesson must be internalized. They must spare us the usual election-year political shenanigans involving populist decisions and policy slippages and stick to the reform agenda Pakistan has signed up to. Absent a realization of the importance of the economy’s structural health on the part of our rulers, that is our only hope of charting a sustainable path to low inflation, respectable growth, and hopefully, at some point, even prosperity.