Finance minister Dr Shamshad says ‘We have worked to fast-track concessional project and program loans from multilateral institutions’
n Initiatives implemented to stabilise economy and build market confidence n Making efforts to tackle inflation, with not passing entire burden of gas, power tariffs raise to public n Pak rupee getting stabilised after action taken against exchange companies.
ISLAMABAD - Pakistan and International Monetary Fund (IMF) would sit for the quarterly review under the nine-month stand-by arrangement by the end of October.
Caretaker Finance Minister Dr Shamshad Akhtar said that the government has worked to fast-track the concessional project and program loans from the multilateral institutions (WB, ADB, IsDB, AIIB).
“We have a pipeline for $6.3 billion in the current fiscal year” said the finance minister said this during a meeting of the Senate Standing Committee on Finance and Revenue here on Thursday.
She further said that the IMF had already approved a programme of three billion dollars.
The finance minister said that she took charge on August 17 and the macroeconomic indicators at that time were “very bad”. The inflation had reached 38 percent but the “good news” was that it was declining, she added.
“The caretaker government has taken proactive measures to stabilize the economy and build market confidence. The government’s stabilization efforts are anchored around the IMF stabilization package”.
She shared the details of inflows. “The good news is that the IMF disbursed $1.2 billion in July 2023. This has also led to the disbursement of $ 3 billion in bilateral assistance (KSA $ 2 billion, UAE $ 1 billion). As a result, the SBP FX reserves have increased to $ 7.6 billion (1.5 months of import cover) in September, from $ 4.5 billion (0.9 months of import) in June”. The second good news is the normalization of trade and investment flows. We have removed the import ban that badly impacted the availability of raw materials for the industry. The government has relaxed import restrictions, leading to the opening of L/Cs for imports and the backlog of import payments (Jan-Jul) has now been cleared, she added.
Dr Shamshad Akhtar said that foreign investors have been allowed to repatriate profits (withheld since 2022), with $ 49.2 million repatriated during Jul-Aug, an increase of 74 per cent. “The caretaker government has taken appropriate actions to stabilize the volatility and speculation in the exchange rate market. Actions taken by SBP on exchange companies and crackdown against illegal transactions have helped to reduce the spreads between interbank and open market,” she said and added that as a result, the PKR has strengthened to 289 against the US dollar in the interbank market, an appreciation of 6.4% from 307.1 (5th Sep). In the open market, PKR has strengthened 13% by 290. The spread between the interbank and open market has declined to less than 1% (from over 9%).
The Finance Minister said that the government is working to bring back remittances through the banking channels and have launched the Sohni Dharti initiative, providing Rs 80 billion budget allocation to banks to increase remittances, of which Rs 20 billion has been disbursed. “We are targeting $ 32 billion in remittances in FY24 (from $ 27 billion in FY23)”. SBP has issued approvals for 5 Digital Banks, while RAAST person to merchant (P2M) online payment system has also been launched in September. These steps will enhance financial inclusion and support growth. PSX has rallied 3% in the month of September 2023, with record profits by banks and energy companies.
She said that steps are being taken to tackle inflation, with the government not passing the entire burden of increase in power and gas tariffs to the public. Around Rs 1 trillion in subsidies is budgeted in FY2024. Inflation has declined to 27.3% in August, down from peak levels of 38% in May 2023. SBP forecasts inflation to decline sharply in 2024 due to the improved agricultural output, and administrative measures taken to curb volatility in the FX markets. SBP has projected 20-22% average inflation for FY24 from 29.2% in FY23. In the current fiscal year, BISP coverage expanded to 9.3 mn households (from 8mn), and cash assistance enhanced to Rs 8,750 quarter (from Rs 7,500).
The finance minister said that the growth outlook has improved with a pickup in some industrial activity and higher crop production. The government targets GDP growth of 3.5% in FY2024, from 0.3% in FY23. Power generation has increased 14% in Aug 2023 and during Jul-Aug FY2024 has recorded an increase of 9%, indicating a recovery in economic activity from last year. Petroleum sales from July to August have recorded a strong rebound, sale of HSD has increased 11% y/y, and Motor spirit by 8%. Cement dispatches were recorded at 7.7 million tons from July to August, with a growth of 45%. Auto sales have witnessed a 49%m/m increase in August due to easing of import restrictions on CKD units. Fertilizer (urea) offtake has rebounded with a growth of 18% in August. Cotton production is estimated to have increased 80% in FY2024. Credit to farmers has increased by 35% during Jul-Aug, indicating strong pick up in farm activity.
Talking about the Current Account Deficit (CAD), she said that it has declined to $ 2.4 billion (0.7% of GDP) in FY23, from $ 17.5bn (4.7% of GDP) in FY22.
In the first two months of the current year, CAD has declined further by 54% to $ 0.9 bn. The full-year CAD is projected to stabilize around $6.5bn (1.5% of GDP) in FY2024 as trade & investment flows normalize. Last year there was a significant 14% decline in workers’ remittances, falling to $ 27bn (from $ 31.3bn in FY22). During the first two months of the current year, the remittances have declined further by 8.5%. This is primarily due to the large spreads between interbank and open market rates, which have incentivized workers to use non-banking channels.
When the caretaker government took office (17th Aug), the dollar-rupee was trading at 295 in the interbank (Aug), a decline of 45% since June 2022. The open market rate was even higher at 304 (17th Aug), with spreads of around 3% to 7%. The devaluation of the Rupee has been a major driver of record-high inflation in the last year. To tackle this problem, the government has taken action against the speculative activity of the exchange companies (ECBs). SBP has issued new regulatory measures including allowing banks to buy and sell foreign currency for individual clients, increased minimum capital requirements for exchange companies, for improving liquidity management, closing down of ‘B’ category exchange companies and their franchises, merging them with ‘A’ category firms, and close down all unlicensed companies.
As a result, the Pak rupee has strengthened to 289 against the US$ in the interbank market, an appreciation of 6.4% from 307.1 (05th Sep). In the open market, PKR has strengthened 13% to 290.
Under the SBA, the authorities are committed to increase SBP reserves to $ 9bn (2.3 months of import cover). The Government targets an increase in SBP FX Reserves to US$ 12 billion (3 months of import cover) by June 2024 based on higher official inflows and pick up in FDI under the SIFC. The key risk to external stability comes from the rise in international commodity prices. Brent crude prices have jumped to $ 95/bbl in Sept, an increase of 27% from $ 74 /bbl in June 2023.
The Finance Minister said that public debt has increased sharply over the last two years due to the rise in interest rates and the exchange rate devaluation. The domestic debt has declined to 45.8 % of GDP in FY23, from 47% in FY21. External Debt to GDP has increased to 42% in FY23, from 34.5% in FY21. The government has taken a proactive approach to curtail fiscal deficit and reduce borrowing from domestic banks. Markets have reacted positively to the recent economic & and financial developments. The T-bill auctions (20th Sept) saw yields on government paper decline 171bps – 217bps across the board. The government raised Rs 2.37 trillion, against participation of Rs 4.58 trillion. Extend the maturity profile of debt.