Economic Policies Under Scrutiny: SBP’s Dollar Procurement and Growth Concerns

Islamabad: The State Bank of Pakistan’s (SBP) strategy of acquiring dollars from the market, potentially sourced from hawala hundi operations, to stabilize the rupee-dollar exchange rate and bolster foreign exchange reserves has come under criticism as an unsustainable approach.

This perspective was shared by Dr. Hafeez Pasha, a former finance minister, during his appearance on Aaj TV’s program ‘Paisa Bolta Hai with Anjum Ibrahim’.

Dr. Pasha also highlighted the challenges facing the economy, noting that with negative expansion in the Large Scale Manufacturing (LSM) sector, coupled with declines in key agricultural outputs, including a 28% drop in cotton production, the nation is unlikely to reach the projected 2% Gross Domestic Production (GDP) growth rate, falling short of the 3.5% target set for the current fiscal year.

Fitch anticipates the Pakistan rupee to be at 285 against the US dollar by June and 295 by the end of FY26.

He emphasized that the SBP’s intervention to maintain the rupee-dollar parity between 278 and 280 is not a viable long-term solution, as exporters require appropriate incentives. He pointed out that the government’s agreement with the International Monetary Fund (IMF) mandates that exporters pay the full 29% tax, a departure from the previous 1% tax on total export income.

He voiced concerns over the absence of tax breaks or incentives for exporters, unlike regional competitors such as India and Bangladesh, which actively support their export sectors. He suggested that if tax relief is not feasible, the government should at least allow for a market-based exchange rate. He referenced SBP data indicating that the Real Effective Exchange Rate (REER) has surpassed Rs100, suggesting that the local currency is overvalued.

Dr. Pasha emphasized the significance of GDP growth as a key economic indicator, noting that it was approximately one percent in the first quarter of the current fiscal year. He added that the nation has consistently failed to achieve an average of 3% GDP growth over the past five years, marking the lowest rate in the country’s history.

He further stated that with a 2.5% population increase, per capita income has decreased, pushing roughly 44% of the population below the poverty line. He also noted that unemployment has surged from 6-6.5% to 22%, the highest ever recorded. The number of unemployed young people has reached 20 million, which is alarming.

He acknowledged the significant decrease in inflation, which fell below one percent in March. However, he pointed out that core inflation, which provides a more accurate reflection of supply and demand dynamics, remains in the 6-8% range.

The discrepancy between core inflation and the overall Consumer Price Index (CPI) is primarily due to fluctuations in the prices of food items and fuel costs.

Wheat and Fuel Prices

A significant 34% decrease was observed in wheat and flour prices, resulting from the government’s decision to suspend procurement processes and support prices under pressure from the IMF, which compelled farmers to sell their produce at lower rates. This, however, may lead to reduced crop sowing in the coming year and the likelihood of a shortfall.

He expressed surprise at the Pakistan Bureau of Statistics (PBS) report of a 15% decrease in fuel prices, despite the government’s policy of keeping prices stable to benefit electricity consumers and support development in Balochistan. He described the PBS data on inflation as highly questionable. He noted that while the current account has improved due to remittances, the trade deficit in goods and services has expanded. The balance of payments comprises the current and financial accounts, with the latter being in poor condition due to foreign outflows exceeding inflows for debt repayment.

Dr. Pasha concluded that even if the current account shows a surplus, the overall balance of payments is unlikely to improve significantly compared to the previous year and may, in fact, worsen.

He contended that the economic stabilization has come at a substantial cost to farmers and has resulted in a significant decline in investment, reaching its lowest level in 25 years.

Foreign Inflows and Investment

Regarding foreign inflows, Dr. Pasha cited estimates from the Economic Affairs Division (EAD) indicating that the country anticipates receiving approximately $19.5 billion in the current fiscal year from various sources, including $9 billion in rollovers from China and Saudi Arabia.

New inflows were projected to be $10 billion in the current fiscal year, but the country has only received approximately $5 billion in the first nine months, which is less than the amount repaid.

He highlighted that SBP data indicates a negative foreign inflow, which is a cause for concern, as reserves have fallen below $10.5 billion, indicating that the economy remains fragile and there is no justification for overconfidence.

Dr. Pasha stressed that the country will remain vulnerable unless exports improve, noting that the widening trade deficit is a long-term indicator of Pakistan’s economic position.

Discussing the global tariff war, he mentioned that the United States is the only country with which Pakistan has a substantial surplus. Pakistan faces a significant deficit of approximately $12-$13 billion with China. He cautioned that the trade war could have implications for Pakistan.

He reported that direct and portfolio foreign investment amounted to approximately $1.4 billion in the first nine months of the current fiscal year, which is similar to the previous year’s level. Despite expectations of $10-$15 billion in investment following the establishment of the Special Investment Facilitation Council (SIFC), these investments have yet to materialize.

Addressing the upgrades by rating agencies, he stated that Pakistan has a score of only 18 out of 100, indicating that the country is still far from achieving investment grade.

He added that the government has agreed with the IMF to finalize the privatization of PIA along with two DISCOs, but this has not yet been accomplished. The government may offer more favorable terms and incentives, including the acquisition of new aircraft with sales tax exemptions, to ensure the successful privatization of PIA.

Regarding the IMF review, he stated that economic indicators until the end of June will be considered. Some indicators have already turned negative. The Federal Board of Revenue (FBR) recorded a shortfall of over Rs 700 billion in the first nine months of the year, which is expected to reach Rs 1000 billion by the end of June, making it unlikely to meet the target set for the current fiscal year.