Pakistan is rapidly approaching a state of economic collapse.
Warning sirens wailed when the country’s coffers became empty.
ISLAMABAD:
Concerns over Pakistan’s economic collapse and hyperinflation are at an all-time high as more than 9,000 containers remain tied up at seaports, endangering the supply chains of crucial supplies.
Experts have raised the alarm about the nation’s escalating financial crisis, warning that record inflation, skyrocketing food costs, and the country’s empty coffers pose a threat to its survival. The escalating situation will soon turn into an unsightly calamity that will affect homes, workplaces, and hospitals.
On the one hand, importers are unable to clear more than 8,531 containers because of a cash crunch. On the other hand, the shipping firms are now threatening to halt operations with Pakistan because of its failure to make payments on time.
Both imports and exports will suffer as a result.
It is impossible to imagine a worse situation given that the central bank’s pitiful $4.4 billion in reserves is barely enough for three weeks’ worth of imports and that, according to sources in the industry and the government, the estimated costs to clear the containers and open additional letters of credit range from $1.5 billion to $2 billion.
Additionally, the government has halted dividend payments totaling over $2 billion, which may harm potential future investment opportunities.
The country’s domestically manufactured goods are likewise based on imported raw materials, therefore the import-dependent businesses are currently on the verge of closing, which would result in the breakdown of supply chains.
Imported products include wheat, fertiliser, cotton, pulses, onions, tomatoes, tyres, newspaper prints, and light bulbs.
On Jameel Ahmad’s visit to a business association office, a businessman begged him to at least tell the banks to open the letter of credits for wheat and pulses so that people might eat.
More than the amount required to keep the economy running smoothly, shortages brought on by broken supply chains will result in a catastrophe where more money will be spent to buy fewer things.
To make matters worse, factories that have stopped producing have started firing employees, which might lead to an employment catastrophe.
Hospitals have begun to run out of medications, and on a wet day, cars may quickly stop on the side of the road due to broken windscreen wipers or low fuel.
Everything from gasoline to grains and pharmaceuticals could soon fall below demand levels. Due to a significant increase in price, the wheat flour crisis has had a negative impact on human life.
In a nation that may be in for more imported inflation owing to sharp currency devaluation, where Pakistan currently has a 25% inflation rate, the supply chain collapse could result in hyperinflation.
The price of PDM hesitancy
In addition to past poor management by all previous governments, the ruling alliance’s indecision has twice postponed the choice to return to the International Monetary Fund, which has worsened the current problem.
According to SBP data, the SBP held $10.9 billion in foreign exchange reserves on April 8, 2022, the day the PTI administration came to an end. From April 9 to August 26 the reserves had decreased by 29% or $3.1 billion, reaching $7.8 billion. In late August of last year, the IMF Board authorised the $1.2 billion loan tranche.
After the IMF programme was restarted, the reserves briefly increased to $8.8 billion before falling back to $7.8 billion when Miftah Ismail stepped down as Finance Ministry director.
At the end of September, Prime Minister Shehbaz Sharif made the decision to change his mind midstream and replaced his finance minister; ever since, the government has been dragging its feet on the resumption of the programme until this past weekend.
As a result, since Ismail was deposed, the nation’s reserves have decreased by $3.5 billion, or 45%, to just $4.4 billion. Since taking office, the coalition government led by the PML-N has lost $6.6 billion, or 60% of the gross reserves.
It has now chosen to restart the programme, but it is still holding out hope that the IMF will provide significant relief from the looming requirements.
According to Dr. Aisha Pasha, Minister of State for Finance, “The government strives to protect the regular folks by putting as little load on them as possible, but the IMF programme is forcing us towards the opposite extreme.”
Industrial chimneys begin to cool
Similar to the last example, the government and the central bank started limiting the bulk of imports a few months ago using administrative controls and pressure techniques since they had so little foreign currency on hand.
According to data derived from the consumption of power, the chief executive of the Trade Development Authority of Pakistan (TDAP), Zubair Motiwala, there has been a fall in industrial activity of 25% to 30%.
The governor of SBP stated last week that they have been resolving 5,000–6,000 cases per month. Since May 2022, 33,000 have been solved. To reduce the cost of imports, several companies that are necessary for the continuance of daily economic and social activity have been designated as non-essential.
Even now, there is a threat of running out of supplies for the things that have already been deemed vital.
The Petroleum Division has notified the central bank that because banks are refusing to open and approve Letters of Credit for imports, the supplies of petroleum products may run out. An oil shipment from Pakistan State Oil has already been cancelled, but the letter of credit for a another shipment that was supposed to load on January 23 wasn’t verified until last week.
On January 30, a crude oil cargo with a capacity of 532,000 barrels is expected to be loaded for Pakistan Refinery Limited (PRL). Its LC, however, has not yet been verified and is currently being discussed with a state-owned bank. Additionally, two PSO gasoline cargoes that are in the pipeline are awaiting the acceptance of LCs by regional banks.
Pakistan has an energy shortage, thus it imports roughly 430,000 MT of gasoline, 200,000 MT of diesel, and 650.000 MT of crude oil each month to meet its energy needs, at a cost of about $1.3 billion.
The situation has drastically worsened this month, and banks are refusing to arrange LCs for industry members. Prior to recently, the banks have been blatantly refusing to open letters or even provide papers for imports that have already arrived but are stranded at ports, which has resulted in the SBP no longer entertaining requests for LC openings.
The bank had released the import documents, but my foreign supplier had not been paid, claimed Ibrahim Tariq Shafi, the owner of a steel and sugar plant in Pakistan.
In a letter to the IT ministry, the telecom sector highlighted concerns over banks’ refusal to create Letters of Credit (LCs) for the telecom companies and claimed that the limitations were delaying the completion of new projects. For the upkeep and growth of their networks, C-Jazz, Zong4G, Telenor, and Ufone, as well as the equipment providers for backend technologies, depend on imports.
Industries continue to stop operating
The businesses have begun temporarily ceasing operations. Because letters of LCs were taking too long to be approved, Beco Steel Ltd. stopped production till further notice.
The supply chain has suffered as a result of “substantial reductions” in its inventory levels. Sitara Peroxide Ltd. informed shareholders that it could no longer run the production facility for a variety of problems, including the lack of LC clearance for essential raw materials.
The continuous inventory shortfall, which was partially imported from abroad, according to Pak Suzuki Motor Company Ltd, has forced them to prolong the closure of their auto facility. Due to widespread demand destruction, Crescent Fibres Ltd. reduced their production by up to 50%.
As a result of high operating costs and weak demand, Suraj Textile Mills Ltd, Nishat Chunian Ltd, and Kohinoor Spinning Mills Ltd also announced reductions in production.
The producer of a well-known brand of foam, Diamond Industries, has halted operations until the “availability of raw material.” The manufacturer of Toyota automobiles, Indus Motors Company (IMC), closed down its local production facility from December 20 through 30, blaming the SBP’s holdup in approving imports.
A severe lack of life-saving medications needed to treat disorders like cancer, diabetes, epilepsy, and heart disease also exists in Pakistan.
A member of the Senate Standing Committee on Finance, Senator Mohsin Aziz, claims that banks are even reluctant to open LCs of $5,000. Senator Aziz stated, “Dollars have only been provided for the import of wheat, fertiliser, defence equipment, and petroleum items.
According to the government, it is not necessary
The Import Policy Order 2022’s list of non-essential import items has affected about 100 different business kinds.
Solar panels, photovoltaic cells, electrical transformers, converters, lamps and lighting fixtures, electrical lighting, signalling equipment, windscreen wipers, newsprint, working parts of steel, sacks, bags, microwave ovens, tricycles, scooters, home appliances CBU, auto CBU, sanitary and bathroom wares, and mobile phone CBU are all included in the list.
The only door is IMF.
The administration has wasted the last four months hoping to sell some family silver and acquire condition-free loans from Saudi Arabia, China, and the UAE. However, this never happened, and the nation’s reserves continued to run out.
The government may have come to the conclusion that the IMF is its only remaining option after being humiliated on all sides.
Once this threshold has been achieved, exporters may begin bringing their revenues from abroad, where they are hoarding the money to benefit from the local currency’s declining value, back home.
This might give the central bank an additional $500 million, which would be enough money to liberate the vast bulk of the 9,000 withheld containers at ports.
