On our journey looking at world economic developments, crises are sadly rarely far away. Indeed, our subject of today has in many ways been one long-running crisis. But the 2022 energy crisis and its consequences has given another shove to the problems of Pakistan. Here is the Financial Times.

Pakistan’s economy is at risk of collapse, with rolling blackouts and a severe foreign currency shortage, leaving businesses struggling to operate as authorities attempt to revive an IMF bailout to relieve the deepening crisis.

A ‘foreign currency shortage’ is not unfamiliar. As we think of that part of that world, Sri Lanka comes to mind. It defaulted last spring. There are some familiar events and phrases below.

Shipping containers full of imports are piling up at Pakistani ports, according to the country’s central bank, with buyers unable to secure the dollars to pay for them. Associations for airlines and foreign companies have warned that they have been blocked from repatriating dollars by capital controls imposed to protect dwindling foreign reserves. Officials said that factories, such as textile manufacturers, were closing or cutting hours to conserve energy and resources.

Capital controls are never a good sign, so let us take a look at the state of play via the central bank and its actions.

State Bank of Pakistan

On Monday it did this:

At today’s meeting, the Monetary Policy Committee (MPC) decided to increase the policy rate by 100 basis points to 17%. The committee noted that inflationary pressures are persisting and continue to be broad-based.

As you can see, they blame inflation, but a 17% interest rate in these times comes with more than a heavy hint of currency troubles, They get along to this eventually:

Second, near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit. The lack of fresh financial inflows and ongoing debt repayments have led to a continuous draw down in official reserves.

Mentions of challenges for the external sector are a red flag, and we soon see that they have crunched imports to try and get by. That means someone has been some combination of cold and hungry. Not the elites, who sail above such inconveniences. Next up they have borrowed from abroad, no doubt in US dollars, and have issues in repaying it. That sounds a lot worse than just the strong dollar of 2022.

In fact we see that there has been quite a trade crunch:

The current account deficit narrowed by around 60% to $3.7bn in H1-FY23. This substantial reduction was due to a sharp contraction in imports, reflecting the impact of policy tightening and administrative measures.

On Monday the State Bank pointed out a particular problem:

The business community, including various trade bodies and chambers of commerce, have highlighted that a large number of shipping containers carrying imported goods are stuck up at the ports, due to delays in release of the shipping documents by the banks.

Then set out to fix it whilst implicitly admitting it was the cause.

In order to facilitate businesses, State Bank of Pakistan withdrew the requirement of prior approval of
imports (falling under HS code Chapters, 84, 85 and certain items under HS code Chapter 87) and
instead gave a general guidance to the banks to prioritise import of certain essential items like food,
pharmaceuticals, energy, etc.

It is quite a restriction on economic life if you have to ask the central bank for permission to do things. Putting it another way, we are looking at the practical implication of capital controls. Below are some others:

Ahsan Iqbal, Pakistan’s planning minister, told the Financial Times that Pakistan had ‘drastically’ reduced imports in an attempt to conserve foreign currency. Analysts said this included restricting banks from opening letters of credit for importers, leading a steel industry body this week to threaten to stop production.

It looks as though the planning minister is not very good at planning, doesn’t it?

Economic situation

The State Bank summary is pretty much a tale of woe:

Sale volumes of automobiles, POL and cement declined significantly in December on a y/y and m/m basis. On the production side, the large-scale manufacturing (LSM) output declined by 5.5% in November 2022. Going forward, production cuts by firms and supply constrains could pull LSM growth further down. Moreover, the latest data on cotton arrivals point to lower crop production than anticipated earlier.

Let us at least have a brief burst of good news.

satisfactory reports about sugarcane production and progress on sowing of wheat crop for the current season

So some foreign currency will be earned here, so let us now look at what the Pakistani rupee has done. It is rather revealing that the monetary policy statement does not state it.

Pakistan rupee

Those of a particularly nervous disposition might like to look away now:

Pakistan’s rupee witnessed massive depreciation against the US dollar in the inter-bank market, falling 9.4% during the trading session on Thursday, as the country moved to fulfil part of the International Monetary Fund (IMF) conditions that included a ‘free-float exchange rate’.

At around 1:30pm, the dollar was being quoted at 254.75 during intra-day trading, a depreciation of Rs23.86.

“This is the largest single-day decline in both absolute and percentage terms, at least since 2000,” said Ismail Iqbal Securities in a note.

Earlier during the day, the currency was trading at 231. (Business Recorder)

I am sometimes critical of the media for use of the word plunge, but in this instance it seems pretty clear. When the day started the currency was some 32% lower over the past year versus the US dollar and when it is over it looks set to be over 40% lower.

That gives us a good and a bad. The good is that if we have a market exchange rate, then Pakistan can go back to the IMF for help. The bad is that it will make the inflation below even worse.

National CPI inflation remained at elevated levels despite some moderation in recent months. Compared to 26.6% y/y in October, the headline inflation slightly eased to 23.8% in November and 24.5% in December 2022. Increase in food inflation remains the major contributor to this persistence in inflation (State Bank of Pakistan)

Comment

There is a long list of problems here and my sympathy goes out to the ordinary Pakistani who is being affected more and more. The latest issue is below.

The difficulties were compounded by a nationwide blackout on Monday that lasted more than 12 hours. Prime Minister Shehbaz Sharif on Tuesday expressed his “sincere regrets for the inconvenience” and said an inquiry would determine the cause. (Financial Times)

Blackouts are becoming more common across the world and inquiries are of course a delay mechanism. More may be coming on that front, because this morning’s exchange-rate move suggests the view expressed to the FT about the IMF may already be seeing ch-ch-changes.

Sharif’s government has said it is committed to reviving the IMF deal to unlock the next tranche of funds. But the sides remain at an impasse over the IMF’s demand that Pakistan accepts economic reforms, such as raising subsidised energy prices.

The problem is that even IMF help seems minor compared to the crisis.

Islamabad’s foreign reserves have dropped to under $5bn, less than a full month of imports, and Sharif’s government remains in a deadlock with the IMF over resurrecting a $7bn assistance package that stalled last year.

Underlying it all is a state that has not only clear corruption issues, but seems able to afford nuclear weapons and other military expenditure whilst many are in poverty.

Originally printed by Notayesmanseconomics and reprinted here with permission.