The caretaker government’s crackdown across Pakistan against illegal foreign currency transactions, electricity, and gas pilferage and hoarding of sugar — all at the same time — has delivered some initial results.

The rupee has regained some of its lost value against the US dollar, sugar prices that skyrocketed in recent weeks have started to fall, and the speed with which power from utilities was being stolen has decelerated.

The action against the wrongdoers can be expected to continue for one simple reason: the International Monetary Fund (IMF) is in no mood to allow space for the caretakers to continue to accommodate the status quo in economic matters — and the crackdown against the wrongdoers has been initiated with the full backing of the army’s top leadership.

The State Bank of Pakistan (SBP) has unveiled a comprehensive strategy to stop the flight of US dollars from the country and has asked low-grade (B-category) foreign exchange companies to upgrade them within three months or risk losing their licenses.

The crackdown against unscrupulous forex dealers, commodity hoarders, electricity and gas stealers, and ease in uncertainty about elections may boost businesspeople’s morale in the near term

The government has announced to set up special courts to try electricity and gas theft. Provincial governments are working more closely with law enforcement agencies to tackle sugar hoarding and smuggling.

The caretaker Prime Minister Anwarul Haq Kakar has dispelled the impression that the caretaker setup is here to stay and has told the nation that his government is ready to hold general elections at the shortest possible notice.

All these good happenings should ideally boost business confidence that remained low till recently. According to a Gallup Survey published in daily newspapers just a week ago, 72 per cent of 500 sample businesses surveyed were concerned about Pakistan’s default — and 49pc of them expressed significantly high concern.

The crackdown against unscrupulous forex dealers, commodity hoarders, electricity and gas stealers, and ease in uncertainty about elections may continue to boost the spirit of businesspeople for some time to come.

But, these actions are not enough to ensure that the external sector weaknesses that remain at the heart of the economic crisis in Pakistan will somehow go away. The caretakers and the powerful establishment know this.

That is why Prime Minister Kakar and top military leadership have separately told businesspeople that the Special Investment Facilitation Council (SIFC) has concrete plans to seek $25-$50 billion in long-term foreign investment from Saudi Arabia, UAE, Kuwait, Qatar and other countries.

They were told that foreign direct investment would start flowing in shortly in five major areas, namely agriculture, defence production, mines and minerals, power sector and information and communication technology.

Such reassurances are heartening and may have a good psychological impact on the business environment. But as regards the beginning of the implementation of the plans seeking foreign direct investment, much depends on how quickly even a sliver of the promised fund comes into the national kitty, how soon general elections are held and an elected government installed smoothly, and whether and how efficiently the new government pursues SIFC policies.

Meanwhile, the forex shortage continues in the country, and the forex reserves of the SBP are on the decline chiefly due to heavy external debt servicing.

During the week ending on September 1, reserves stood at $7.78bn, barely enough to cover goods’ imports bill of just seven weeks. And, despite recent gains, the rupee has already lost 6.62pc of between July 1 and September 7.

The government has so far been able to contain goods’ imports even though the country has officially lifted most import restrictions. The import bill will rise gradually once economic activity that stands stalled now gains some speed. The government cannot afford to keep the wheels of the economy jammed, and the import-led demand for dollar cannot be suppressed anymore.

Expecting any substantial growth in goods exports within months is too much to ask from exporters amidst the rising cost of energy and finance. Growth in remittances, too, may take longer to materialise, though the recent crackdown on illegal forex traders and a slight easing of political uncertainty may encourage overseas Pakistanis to send more foreign exchange back home.

Providing any relief to exporters in terms of subsidies for energy or heavily subsidised interest rates is no longer possible because of the IMF conditions.

But if the government can contain its borrowings from commercial banks, leaving enough liquidity that can be channeled towards the private sector, that may be of some help for at least some of the competitive export houses. (Between July 1 and August 25 this year, the federal government’s borrowings from banks have doubled to Rs1.65 trillion from Rs871bn in the same period last year, according to the latest SBP stats).

But in the face of 27.4pc inflation in August and amidst further buildup in inflationary pressures due to hikes in electricity and gas prices across all sectors, the central bank may have to increase its key policy rate again in mid-September. If that happens, reduced government borrowings and the subsequent creation of space for private-sector lending by banks will be of no great help to the private sector.

The caretaker government has now decided to experiment with borrowings from the capital market. It has decided to use those borrowings exclusively for state-owned enterprises that need massive capital injection for survival and expected growth.

Whether the plan works well depends on how the capital market investors perceive the instruments of the borrowings (bonds, shares or certificates of investment) to be adopted and the country’s general economic and investment environment.

Published in Dawn, The Business and Finance Weekly, September 11th, 2023