As the country gets closer to the vote on the motion of no-confidence against the Prime Minister, the economic news gets worse, indicating that whoever is in power when the dust settles, the present government or the present opposition; will have a hard row to hoe. One of the first things to be noticed is that there has been a flight of capital abroad, as investors are disinvesting in Pakistani dollar-denominated paper. Once again, portfolio investment is proving to be an unreliable crutch to rely on, with foreign investors taking their money elsewhere at the first sign of trouble.
This is not the only factor behind the fall of the rupee, as there have been a number of debt servicing payments falling due, with all this pressure being worsened by speculators seeking safe havens, with the result that the value of the rupee has been facing tremendous pressure, which has led to its slide. The State Bank of Pakistan has found itself obliged to use its foreign exchange reserves to prop up the rupee. The prevailing doctrine at the SBP has been that it is unwise to defend the rupee by using borrowed foreign exchange, but the rupee has fallen so much so fast that the SBP found it necessary to intervene with those borrowed reserves. It should not be forgotten that a lower rupee value creates problems of its own, and there is only so much that the SBP can stand without intervening.
That borrowing had been done to build up reserves to a level acceptable to the IMF. The latest review talks have however run into trouble, not just because of the use of reserves, but because of the populist subsidies on fuel prices and power tariffs announced recently by the PM. The IMF is not satisfied with the government’s explanation of where the money is to come from. The IMF is also apparently engaging in a policy of wait and see. Like the entire country, it seems the IMF is also waiting for the result of the no-confidence motion. Though, whoever wins will still have to agree to the terms the IMF dictates so as to continue with the current programme, it is likelier than not that the IMF would like to know who they are dealing with. For that, it seems the result of the no-confidence motion will be necessary.
