Pakistan’s Economy in Crisis: Dar Blames IMF
Pakistan finds itself in the grips of one of the most severe economic crises in recent memory as the fiscal year 2023 draws to a close. Finance Minister Ishaq Dar has taken a defensive stance, defending his policies while pointing fingers at the International Monetary Fund (IMF) for the imported stagflation that has wreaked havoc on the country’s economy.
During the presentation of the Economic Survey 2023 on Thursday, Dar reiterated his support for controlling the rupee-dollar exchange rate, arguing that the IMF’s recommended depreciation has only worsened inflation caused by imports. He declared, “Devaluation is the root cause of all economic problems.”
Dar also expressed bewilderment at the “experts” who advocated for rupee depreciation to boost exports, questioning why the significant devaluation had failed to yield the desired results. He humorously remarked, “I have no idea which world they live in.”
Despite the sharp depreciation of the rupee, Pakistan’s export earnings have plummeted during the outgoing fiscal year of 2023.
Meanwhile, the IMF has once again stipulated that the government relinquish control over the rupee and allow market forces to determine the exchange rate. This condition is seen as a crucial step to revive the stalled $6.5 billion loan program. The IMF believes that adopting a market-based exchange rate would assist the government in stabilizing the faltering economy.
It is noteworthy that when Dar assumed office as finance minister in September 2022, the rupee was valued at around Rs228 against the US dollar. However, following the arrest of former Prime Minister Imran Khan and subsequent law and order issues, it hit an all-time low of Rs299/$ in the inter-bank market on May 11.
Back in September-October 2022, Dar asserted that the fair value of the rupee should fall within the range of Rs180-200/$. However, the rupee never traded within this range after September 2022. On Thursday, it closed at Rs286.80/$ in the inter-bank market, reflecting a significant drop of almost 21% or Rs60 since Dar’s return last September.
During the press conference for the Economic Survey, Dar squarely placed the blame for rupee devaluation on the IMF. He argued that the devaluation had led to imported inflation, prompting the central bank to raise its key policy rate to a record high of 21%. This substantial 7.25 percentage point increase in the rate during the outgoing fiscal year has inflated interest payments on the country’s overall debt.
The State Bank of Pakistan (SBP) announced on Friday that it will convene a meeting of the Monetary Policy Committee (MPC) on Monday, June 12, 2023, to make decisions regarding the country’s monetary policy. It is widely expected that the central bank will maintain its key interest rate at 21%.
In May, inflation reached a six-decade high of 38%. Moreover, the volume of interest payments surged to around 70% of FBR revenue collection in FY23. Dar explained, “Monetary policy has been tightened due to high inflation caused by currency devaluation, resulting in increased interest payments.”
According to Dar, the rupee is currently undervalued and needs to be addressed. He expressed confidence that the currency would eventually recover significantly, cautioning that currency speculators would suffer losses when the exchange rate appreciates in the future.
Citing a Bloomberg article, Dar referred to the fair value of the rupee, which stands at Rs244/$ according to the international matrix of the real effective exchange rate (REER).
Fahad Rauf, Head of Research at Ismail Iqbal Securities, commented on Dar’s predicament, stating that the finance minister was attempting to save face in light of the failure of his policies. With no other options left, Dar is reluctantly implementing IMF recommendations to revive the loan program and safeguard the economy from default, Rauf said.
Amidst these economic challenges, the manufacturing sector holds a dominant position in Pakistan’s industrial sector, contributing 12.01% to the country’s GDP. However, large-scale manufacturing (LSM) recorded negative growth of 8.11% during the July-March period of FY2023, compared to a growth of 10.61% in the same period last year.
The textile sector, in particular, experienced a significant decline of 16.03% during the July-March period of FY2023, compared to a growth of 3.23% in the corresponding period last year. This decline can be attributed to various factors, including a global economic slowdown that has reduced the demand for Pakistani textile products.
Furthermore, flood damages have resulted in losses for the cotton industry, which constitutes half of the industry’s required cotton input. Additionally, the contractionary policy stance, including higher policy rates, increased energy charges, and restrictions on the import of raw materials and machinery, has made it increasingly challenging for businesses to operate and export.
Published in PakWeb, June 9th, 2023.
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