PAKISTAN’S external sector troubles refuse to go away while the world watches everything and takes decisions accordingly.

The recent downgrading of Pakistan’s rating by Moody’s from ‘stable’ to ‘negative’ is not without reason.

In eleven months of this fiscal year, the current account deficit has increased to about $16bn, from a little more than $11bn in the year-ago period. But thanks to amortisation of roughly $4bn foreign loans obtained mostly from friendly countries, overall balance of payments showed a surplus of nearly $6.5bn.

This gave the central bank room to draw down on forex reserves for external debt servicing. But the pressure on the exchange rate, due to the massive C/A deficit, kept mounting. And, despite depleting its reserves, the State Bank of Pakistan (SBP) could not keep the local currency stable. It had to let the rupee fall during the current fiscal year.

SBP’s net forex reserves have plunged to $10.264bn now (as of June 14), enough to cover imports of just a little over two months, from $16.145bn at end-June last year—showing a decline of $5.881bn or more than 36pc. And, the rupee has plummeted to 121.46 to a US dollar (as of June 21) from 104.85 per dollar at end-June last year.

All hopes pinned on a dramatic rise in foreign direct investment also collapsed and the country barely managed to haul in $2.5bn of FDI in eleven months of the fiscal year, the same as in the year-ago period.

Home remittances and exports kept growing during eleven months of this fiscal year, the former at a nominal rate of 3pc and the later at an impressive rate of 15pc. But in eleven months of the year, imports consumed $55bn—an amount that exceeded the combined earnings of exports ($21.3bn) plus remittances ($18bn) during this period.

Moody’s June 20 decision to downgrade Pakistan rating from stable to negative “is driven by heightened external vulnerability risks,” the international credit rating agency stated in a press release.

“Foreign exchange reserves have fallen to low levels and, absent significant capital inflows, will not be replenished over the next 12-18 months. Low reserves adequacy threatens continued access to external financing at moderate costs, in turn potentially raising government liquidity risks,” the press release said.

Cutting through the jargon, the statement simply means that even if Pakistan returns to the international financial markets for raising external funds via bonds, it cannot do so without offering higher interest rates because its central bank’s net forex reserves have fallen below the internationally acceptable level of equal to three months of the country’s imports bill.

And that, in turn, will further aggravate the federal government’s fiscal account because if the government makes no external borrowing at all, meeting external debt payments will become difficult but if it does borrow, it would add to an already high cost of external debt servicing. So, here we are.

This is why the caretaker government is making an all out effort to make the tax amnesty scheme, introduced by the previous political government, a success and get as much foreign exchange back home as possible.

The SBP is also lending a helping hand in this regard. In the latest move, the central bank simplified the procedure for declaring hidden assets under the ongoing tax amnesty scheme and introduced a few provisions in the rules, all aimed at ensuring that after declaration forex assets held abroad are brought back home via banking channels.

All tax payments, under the tax amnesty scheme, can be made through banking channels either from the accounts of those making tax declarations “or from the accounts of immediate family members i.e. his/her parents, children, spouse and siblings,” SBP said in a notification issued on June 21.

The central bank is understandably eager to fix the external account situation by trying to get back undeclared wealth parked abroad as the caretaker government is not authorised constitutionally to borrow funds from the International Monetary Fund (IMF). Only the next elected government can do so.

This makes holding elections on the due date of July 25, and the smooth installation of the new elected government, all the more important.

On the one hand, firefighting on the external account front continues and on the other Pakistan is also struggling to strengthen its anti-money laundering and combating financial terrorism (AML/CFT) regulations to skip any adverse action from the Paris-based Financial Action Task Force (FATF).

Just a few days ago, the Securities and Exchange Commission of Pakistan (SECP) issued a unified set of rules and regulations to check money laundering and combating financial terrorism. And, caretaker Finance Minister Dr Shamshad Akhtar warned the corporate sector, in her maiden meeting with officials of the PSX, to behave responsibly.

Whereas the newly introduced unified set of regulations of SECP seeks compliance from corporate Pakistan, including non-bank finance companies, the central bank through an elaborate AML/CFT regime has already been seeking such compliance from all banks and development finance institutions.

In mid-June, the SBP took another important step towards deeper monitoring of banks for evaluation of risks to the entire banking system including in the area of AML/CFT and designated three banks i.e. HBL, UBL and the state-run NBP as systemically important banks.

This earned a credit positive from Moody’s and the rating agency has duly appreciated this move. In fact, by declaring the three banks as systemically important ones, the central bank has not only helped itself in risk evaluation of all kinds but has facilitated foreign regulators and credit rating agencies, officials of these banks say proudly.

Published in Dawn, The Business and Finance Weekly, June 25th, 2018