Experts have sounded alarm bells that the country is facing a deepening financial crisis with fears it could go bankrupt as inflation rises to record levels, food prices rocket and its coffers run dry. The mushrooming crisis will soon tip over into an ugly catastrophe striking households, offices and hospitals.
On one hand, importers are unable to get over 8,531 containers cleared due to a shortage of dollars. The shipping companies, on the other hand, are now threatening to suspend Pakistan’s operations over the country’s failure to make timely payments.
This will hurt both imports and exports.
There cannot be a worse situation than this as the central bank has a paltry $4.4 billion in reserves – barely enough for three weeks of imports – while the estimated needs to clear the containers and pending requests for opening more letters of credits stand in the range of $1.5 billion to $2 billion, according to people in the industry and government sources.
In addition to that, the government has stopped over $2 billion in payments of dividends, which will hurt future investment prospects.
The import-dependent businesses are now teetering towards closure, which would trigger a breakdown of supply chains, as the country’s domestically manufactured goods are also based on imported raw materials.
Goods such as wheat, fertiliser, cotton, pulses, onions, tomatoes, tyres, newspaper prints and electric bulbs are all imported.
“At least tell the banks to open the letter of credits for wheat and pulses so that people have something to eat,” a businessman pleaded to Jameel Ahmad, the SBP governor on his visit to a business association office.
More than the amount needed to grease the wheels of the economy, it is the impact of shortages due to disruption in supply chains that will cause catastrophe in the shape of more money chasing less number of goods.
Meanwhile, to make the matters worse, factories that have halted production have started laying off workers, potentially precipitating an employment crisis.
Hospitals have started running short of medicines while the cars may soon shut off on the roadsides on a rainy day due to malfunctioning of windscreen wipers or depleted fuel.
From petrol to pulses and medicines, everything might fall below the demand levels very soon. The wheat flour crisis has taken a toll on human lives due to a massive surge in prices.
Pakistan is already facing a 25% inflation rate and the breakdown of the supply chain may cause hyperinflation in a country that might be in for more imported inflation due to steep currency devaluation.
Cost of PDM indecisiveness
Apart from past mismanagement by all successive governments, the current crisis is aggravated by the indecisiveness of the ruling alliance that has twice delayed the decision of going back to the International Monetary Fund.
The SBP data showed that on April 8th, 2022 when the PTI tenure ended the SBP had $10.9 billion in foreign exchange reserves. The reserves depleted by 29% or $3.1 billion from April 9 to $7.8 billion on August 26th. The IMF Board approved the loan tranche of $1.2 billion in late August last year.
After the revival of the IMF programme, the reserves slightly bounced back to $8.8 billion before again depleting to $7.8 billion when Miftah Ismail left the command of the Finance Ministry.
Prime Minister Shehbaz Sharif decided to change horses in midstream and replaced his finance minister towards the end of September and since then the government had been dilly-dallying on the revival of the programme until this weekend.
As a consequence, the country’s reserves have now further depleted to a mere $4.4 billion –a reduction of $3.5 billion or 45% since Ismail was ousted. Overall, the PML-N-led coalition government has lost $6.6 billion or 60% of the gross reserves since it came to power.
It has now decided to revive the programme but still hopes that the IMF will give major relief against the pending conditions.
“The government wants to insulate the ordinary citizens by putting less burden on them to as much extent as possible but the IMF programme is pulling us towards the other extreme,” says Dr Aisha Pasha, Minister of State for Finance.
Industries chimneys start cooling off
Similarly, because of almost negligible foreign currency in hand, the government and the central bank a few months ago started stopping the majority of the imports through administrative controls and arm-twisting tactics.
Zubair Motiwala, the chief executive of the Trade Development Authority of Pakistan (TDAP), said that data suggested that there has been a 25% to 30% reduction in industrial activity, gauging from the usage of electricity.
This week, the governor of SBP said that they have been solving between 5,000 and 6,000 cases per month. They have resolved 33,000 since May 2022. But many businesses that are essential for the continuation of daily economic and social life have been declared non-essential to lessen the import bill.
The items that have already been declared essential are even on the verge of shortage of supplies.
The Petroleum Division has warned the central bank that the stocks of petroleum products may dry up as banks are refusing to open and confirm LCs for imports. An oil cargo of Pakistan State Oil has already been cancelled while LC for another cargo, scheduled for loading on January 23, was not confirmed till last week.
One crude oil cargo of 532,000 barrels for Pakistan Refinery Limited (PRL) is scheduled for loading on January 30. However, its LC has not so far been confirmed and it is being negotiated with a state-owned bank. Two petrol cargoes of PSO, which are in the pipeline, are also awaiting the confirmation of LCs by local banks.
Pakistan is an energy deficit country, in order to fulfil energy demand approximately 430,000 MT of petrol, 200,000 MT of diesel and 650.000 MT of crude oil are imported on a monthly basis at a cost of around $1.3 billion.
The situation has severely deteriorated during the current month; banks are declining LCs establishment to Industry members. Earlier, the SBP was entertaining requests for LCs openings but now the banks are plainly refusing to open letters or even release documents for the imports that have already arrived but are stuck up at ports.
I faced a unique situation, my foreign supplier did not receive payment despite the bank releasing the import documents, said Ibrahim Tariq Shafi, who runs sugar and steel mills in Pakistan.
The telecommunication industry, in a letter to the IT ministry, expressed apprehensions over banks’ refusal to open LCs for the telecom companies and said that the restrictions were causing delays in the execution of new projects. C-Jazz, Zong4G, Telenor, and Ufone, as well as the backend technology equipment suppliers, are dependent on imported items for maintenance and expansion of their networks.
Industries keep suspending operations
The industries have started shutting down operations temporarily. Beco Steel Ltd halted production until further notice owing to delays in the approval of letters of LCs.
Its inventory levels have seen “significant reductions” with a negative impact on the supply chain. Sitara Peroxide Ltd informed shareholders it was no longer possible for it to operate the production facility due to many reasons, including the non-clearance of LCs for necessary raw materials.
Pak Suzuki Motor Company Ltd said the ongoing shortage of inventory, which was partly imported from abroad, has led it to extend the shutdown of its automobile plant. Crescent Fibres Ltd cut back its production by up to 50% owing to widespread demand destruction.
Suraj Textile Mills Ltd, Nishat Chunian Ltd and Kohinoor Spinning Mills Ltd also announced production cuts partly because of high operational costs and low demand.
Diamond Industries, the manufacturer of a popular brand of foam, has suspended production until the “availability of raw material”. Indus Motors Company (IMC), the maker of Toyota vehicles, had shut down its production plant in the country from December 20-30, citing a delay in import approvals by the SBP.
Pakistan is also facing an acute shortage of life-saving drugs needed to treat cancer, diabetes, epilepsy and heart conditions,
Senator Mohsin Aziz, member of the Senate Standing Committee on Finance, says that banks are even hesitant to open LCs worth $5000. “Dollars have been provided only for the import of wheat, fertiliser, defence equipment and petroleum products,” said Senator Aziz.
Non-essential in Govt eyes
About 100 types of businesses have been hit by the list of non-essential Import Items under the Import Policy Order 2022.
The list includes solar panels, photovoltaic, cells, electrical transformers, converters, lamps and lighting fittings, electrical lighting, signalling equipment, windscreen wipers, newsprint, working parts of steel, sacks, bags, microwave ovens, tricycles, scooters, electrical machinery, home appliances CBU, auto CBU, sanitary and bathroom wares, mobile phone CBU.
IMF is the only door
The government has wasted the past four months in the hope that it will receive condition-free loans from Saudi Arabia, China and the UAE in addition to selling some family silver. However, this did not materialize and the country’s reserves kept depleting.
After facing embarrassment from all sides, the government might have now reached a conclusion that the IMF may be the only door left open for it.
Once this door is crossed, the exporters may start bringing back their receipts from abroad where they are keeping the money to take advantage of depleting local currency value.
This may provide $500 million more to the central bank –the funds sufficient to unlock the majority of around 9,000 withheld containers at ports.