Rupee stability brings early optimism

KARACHI:

In a little over nine months, the rupee has ventured into uncharted territory, crossing Rs 280/$ in the interbank market on March 3, 2023.

Since then, the economic landscape has been a rollercoaster, punctuated by the familiar refrains of “the IMF (International Monetary Fund) is coming,” “the fair value of the rupee is 250,” “elections will be delayed” and “Pakistan will go bankrupt . »

Notably, the rupee also touched Rs307 and Rs325/$ on August 30, introducing real fears of normalization of various financial variables. Despite this economic upheaval, the general population has yet to feel the relief. With a devaluation of over 50% in a year, it would take 2-3 years of the current “stability” for the masses to regain their purchasing power.

The wage-earning class, often receiving single-digit raises or early-teenage after-tax raises, is lagging behind in the race to boost real incomes. The economic contraction, fueled by tight fiscal policy, high energy prices, abnormal interest rates and low investment, has widened the pool of unemployment, casting a shadow on public sentiment.

However, amid the prevailing doom and gloom, there are glimmers of initial optimism. International oil prices are in an unrelenting decline, a consequence of the global economic slowdown following a rapid increase in global interest rates.

Demand moderates, while fuel displacement gains momentum. Although oil prices are slowing, oil remains a critical factor in the global economy and Pakistan’s development ambitions, accounting for around 30-35% of the country’s imports.

Surprisingly, the de facto leaders of OPEC+ – MBS and Putin – have shown reluctance to take meaningful action to reverse the trend. With a significant loss of market share, prices are expected to fall further to $55-65, necessitating a stronger cut, possibly the last in agreement.

The market is poised to be driven by efficient drillers rather than traditional cartels. Countries like Saudi Arabia, the United Arab Emirates and Russia are unlikely to allow the US and others to dominate indefinitely, especially as their economies diversify.

Reading Rupee receives support from rising foreign reserves

Apart from these external factors, the caretaker government has shown a fast pace in implementing initiatives. The rapid completion of the IMF review, prudent implementation of natural gas price hikes, tight monetary policy, crackdown on smuggling and legislative reforms on the privatization agenda have contributed to a clear vision of economic prosperity.

In particular, visits to Arab countries, including two major Saudi investors – Aramco and Saudi Wafi – buying stakes in Pakistani oil trading companies, signal increased domestic appeal, hinting at more positive developments. Moving forward, it is vital to complement these positive efforts with strong reforms to improve efficiency.

After the election handover is over, priorities should include raising direct taxes, encouraging foreign investment, removing trade barriers, ending smuggling and underpricing, facilitating the handover of state-owned enterprises to the private sector ( KOE), especially electricity distribution companies (DISCOs). ), and boosting IT and other exports by 30 and 20% per year. Period!

To strengthen the federal fiscal health, devolution of responsibilities like Benazir Income Support Program (BISP), farm pipe subsidy, HEC, provincial PSDP and loss of DISCOs to provinces is imperative.

Allowing provinces to run their own affairs, raising taxes on agriculture, retail and property according to their needs and spending on their people aligns with a more decentralized approach.

The role of the federal government should shift towards policy making, legislation, coordination and representation of a Pakistan that is open and conducive to business. Achieving this requires recognizing the potential of 250 million people as customers or workers, addressing the neglected section of Pakistan’s youth in education and health, and reorienting efforts towards ‘Awaam ka Pakistan’, not ‘Ameer ka Pakistan”.

THE AUTHOR IS AN INDEPENDENT FINANCIAL ANALYST

Published in The Express Tribune, December 18^u2023.

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