There is no such thing as a quick fix when it comes to the economy of a country. Yet in the very small mandate it is supposed to have the country’s current caretaker government showing it was going to try and trudge through the chaos that is Pakistan’s broken economy.
So what is happening? There is a lot to unpack from Thursday. Perhaps most notably the rupee found a leg to stand on rising in the interbank market rising Rs2.04 against the dollar to come to 304.94 from yesterday’s close of 306.98. Perhaps more importantly, according to the Forex Association of Pakistan (FAP), the dollar was selling for Rs307 in the open market — down by Rs5 from the previous day’s Rs312.
The bridging of the gap between the interbank and open market rates comes after the State Bank of Pakistan (SBP) on Wednesday decided to introduce structural reforms in the exchange companies’ (ECs) sector.
Prime Minister Kakar told a delegation of businessmen that the government was reforming the tax system through digitisation and underscored the need to boost tax collection for economic development. On the same day the State Bank of Pakistan also stepped up supervision of the foreign exchange market, ordering banks to set up separate entities to conduct forex transactions and extending a clampdown on hard-currency hoarders and smugglers. On the SBP front many brokerage houses said they were expecting the SBP to hike the key policy rate by 150 basis points (bps) in its upcoming Monetary Policy Committee (MPC) meeting on September 14 as it looks to tame runaway inflation in the country.
At the same time it must very much be remembered that the caretaker government has a helping hand from the Pakistan army. The SBP’s decision to crack down on money exchanges came only a few days after Chief of Army Staff General Asim Munir in a slew of meetings with leading businesspersons assured them that there would be transparency in the rates of foreign exchange in due time.
On Thursday the 259th Corps Commanders’ Conference at the General Headquarters (GHQ) in Rawalpindi resolved to “wholeheartedly” assist the government in curbing all illegal activities that hamper economic growth, stability and investor confidence. With the military already actively involved due to its presence in the Special Investment Facilitation Council it is quickly becoming clear that the economy is now being very carefully managed.
The good news in this is that there is now a clear direction in which the economy is being managed. Backed by the military leadership the caretakers have decided to increase OMC margins which will increase the price of petrol as well. Normally, governments wait for the OMCs to threaten a strike until giving them a small increase in margins. The government is also set to increase gas prices despite rising inflation.
During the PDM coalition government, Ishaq Dar’s blundering and the threat of default left the economy in tatters. Decision making was slow, indecisive, and put Pakistan in a position where there was no clarity as to the future. Perhaps because the caretakers do not have the worry of re-election in mind they are not concerned about making these tough calls that will lead to further inflation in the short term and difficulties for everyday people.
The bad news, however, is that while these are decisive and tough decisions the caretakers can only do so much in the time they have. The one thing that Pakistan is still very much lacking is political stability. Long-term macroeconomic reforms require a government with a mandate. And while the caretakers have the mandate for now and even the right backing, there is still no surety about elections. Until that is cleared up Pakistan is living on borrowed time. It is imperative for these matters to at least be cleared up before any further actions can be taken to help he economy.