The inevitable has happened. On August 24, the Pakistani rupee fell below 300 to a US dollar in the interbank market. In less than two months of this fiscal year (between July 1 and August 24), the rupee has lost about five per cent value against the mighty greenback.

The dollar has been on the rise since the lifting of import restrictions from the beginning of this fiscal year on July 1 at the insistence of the International Monetary Fund (IMF). Uncertainty regarding the timing of general elections in the country is high. The ongoing political/judicial/constitutional crisis is growing intense day by day. That is why a trend of dollarisation of assets seems to be in the works. Purely speculative dollar buying from the open market is also in progress. On August 24, the rupee was seen trading in the band of 315-317 in the open market.

The rapid fall in the rupee’s value has eroded business confidence. Wholesalers of several imported items, most notably solar panels, have started revising prices on a daily and hourly basis, making it difficult for retailers and end-users to absorb quick price shocks. This is contracting demand on the one hand and pushing up inflation on the other.

Frequent upward revision in electricity, gas, petrol and diesel prices is another equally strong factor that continues to fuel inflation, resulting in reduced industrial output. Stagflation during this fiscal year, similar to last year, cannot be ruled out if the situation does not improve.

Since the State Bank’s reserves are falling and no major forex inflows are in sight, further erosion in the rupee’s value seems inevitable

The rupee has shed 32.5 per cent of its value against the dollar in less than eight months of this calendar year. Prices of electricity and petrol and diesel have been twice increased, and a third increase is around the corner. Gas prices are already up more than 100pc, according to the Pakistan Bureau of Statistics (PBS).

Numbers for general consumer inflation in August will be released next week. However, according to the PBS, annual inflation measured through the sensitive price index stood at 27.6pc during the week ended August 17.

The PBS report admits that during a year, average prices of wheat flour shot up 131.3pc, followed by tea (95.2pc), rice Basmati broken (88.8pc), chillies powder (86pc), rice Irri-6/9 (84.2pc), sugar (74.7pc) and Chicken (58.6pc).

The caretaker government’s is all set to launch a crackdown against currency speculators and illegal foreign exchange firms. The planned crackdown, if carried out sensibly, may cool pro-dollar sentiment for a brief period. However, since the State Bank of Pakistan’s forex reserves are falling due to external debt payments and no major forex inflows are in sight, further erosion in the rupee’s value seems inevitable.

The central bank’s forex reserves slipped to $7.93 billion on August 18 from $8.17bn at the end of July. This amount is insufficient to cover the goods’ import bill for even two months.

The caretaker government must also see to it that food prices do not go further up due to policy weaknesses. Further rise in food inflation that is very much possible due to energy price hikes, weaker rupee and uptick in international commodity prices will worsen Pakistan’s political crisis. And that will lead to further inflationary expectations, setting a “vicious circle” in full motion. In July, annualised food inflation was at 40.2pc in urban areas and 41.3pc in rural Pakistan.

Key challenges that the caretaker government face and the newly elected government will face are (1) how to fix the external financing gap to save the rupee and the country’s forex reserves from a free fall and (2) how to achieve economic growth of at least 3.5pc to minimise joblessness and poverty.

Even if everything else goes as planned, closing the external financing gap requires $4.5bn in borrowing from foreign commercial banks and securing $1.5bn through Eurobonds and international Islamic bonds (Sukuk). Under the present circumstances, both seem implausible.

Obtaining 3.5pc growth rate seems unlikely because the industrial output cannot grow at the required pace amidst falling rupee, higher inflation and rising cost of production due to energy price hikes and higher interest rates.

The agriculture sector offers some hope. However, boosting agricultural output is also very challenging due to the rising cost of agricultural inputs amidst inflationary pressures and the non-availability of funds for short-term investment in the agriculture sector.

If elections are held with minimum delay in the constitutionally required period of 90 days, if the newly elected government succeeds in establishing an exemplary working relationship between the federation and provinces (that too is very difficult), and if the IMF relaxes some of its ongoing loan programme conditions only then agriculture sector can grow and contribute to some expansion in the economy.

Much depends then on some sub-sectors of the services sectors of the economy like housing, financial services and transportation. The financial sector is doing well. Housing’s expansion depends on whether caretakers and the newly elected government can introduce some reforms after seeking relaxations from the IMF in its tough loan programme conditions.

Transportation’s performance will remain dependent not only on the above-mentioned ifs but also on how the caretakers and the newly elected government treat the small and medium enterprises (SMEs). Currently, the SME sector is in deep trouble. No financing or financing at exorbitant rates, spiralling energy prices, fast depreciating rupee, declining economic purchasing power, ever-spreading lawlessness and rampant corruption in government departments have eroded SMEs’ confidence.

A more than 10pc decline in large-scale manufacturing output and the ever-rising cost of imported raw materials have forced many industrial SMEs to close business.

The economic situation is alarming. Only sound economic policies implemented honestly and saner politics carried out without “undue intervention of the establishment” can help improve this situation, though not in the current fiscal year.

Published in Dawn, The Business and Finance Weekly, August 28th, 2023