Titans’ clash threatens rupee gains, IMF review

Two heads are better than one, goes the old saw. But two in this case seem to be too many – as in too many cooks spoil the broth. At stake is the economic wellbeing of the country, but does anyone care?

By Muhammad Ali

ISLAMABAD: The ongoing tussle between the two top economic managers of the caretaker government shows no signs of ending, casting an ominous shadow over the prospects of Pakistan’s economy in near term, Independent Pakistan can report.

Experts say the rupee’s recent gains against the dollar on the back of strong administrative measures could stall or even slip as Caretaker Minister for Finance Dr Shamshad Akhtar and Special Assistant to Prime Caretaker Minister (SAPM) on Finance Dr Waqar Masood Khan remain unable to play ball together.

Even worse, their endless turf war now seems set to spoil the second review of the International Monetary Fund (IMF) Stand-By Arrangement (SBA), due in late October or early November, potentially delaying a cash injection of around USD 1 billion into the country’s cash-strapped economy, triggering another round of rupee depreciation.

Insiders say Dr Akhtar and Dr Masood Khan have so far failed to narrow down their differences over the distribution of responsibilities to manage the economy until the next elected government steps in. The two stalwarts participate in the ECC of the Cabinet meetings but nothing concrete has been done by the caretaker setup to address the pressing issues of the ailing economy.

Dr Shamshad Akhtar is said to be immersed in drawing up an economic revival plan but she has so far remained unable to come up with an external financing plan. Pakistan needs USD 24.6 billion to meet its foreign debt service needs over the current fiscal, and another USD 4 to USD 5 billion to bridge the current account deficit (CAD). The country’s total external financing needs stand at USD 30 billion.

In a clear sign that the relationship is beyond repair, the staffed third-floor office allotted to Dr Khan at the Ministry of Finance has been withdrawn. The grapevine has it that the SAPM is now working from home, although he may soon get a new office at the PM Secretariat.

In recent weeks, Pakistan has taken strong administrative measures to tackle rampant smuggling and hoarding of dollars to alleviate undue pressure on the rupee. But the work assigned to the economic team has failed to materialise up until now, putting a question mark on the sustainability of the rupee’s rally.

All told, the foreign exchange reserves held by the State Bank of Pakistan (SBP) have eroded by over USD 1.1 billion under the interim government, putting the rupee under immense pressure.

After stern action by the LEAs to discourage currency speculation and to stem the flow of hard currencies into the black market, the rupee appreciated by PKR 40 in the open market and around PKR 20 in interbank market in the last couple of weeks.

However, the authorities believe the rupee is still undervalued, and should trade at around PKR 250 to a dollar. But administrative measures alone may not be adequate to take the local currency all the way.

The need of the hour, therefore, is to improve the cash flow by securing hard currency inflows by strong economic measures. “The PKR 250 to a dollar target is realistic but only if the authorities are able to improve the fundamental balance by securing dollar inflows” one top expert told Independent Pakistan.

What is more, Pakistan needs to be on a sound footing going into the second review of the IMF’s USD 3 billion SBA, due in late October or early November. With the economic decision making at a virtual standstill, it is difficult to see how the caretaker government can convince the IMF to expeditiously initiate parleys and then conclude review talks.

Any delay in concluding the review will automatically translate to delayed dollar inflows, putting the rupee under renewed pressure and exacerbating the country’s economic woes in the months ahead.