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Confluence of policy, market failure – Newspaper

ON the heels of the sudden surge in inflation beyond expectations and a record trade deficit, Prime Minister’s adviser on finance and revenue Shaukat Tarin came out in the public to pump possible confidence to the markets that were seen rapidly shedding value of rupee and share prices.

He expects the foreign exchange reserves to reach $20.5 billion in a couple of weeks from about $16bn at present with $3bn inflows from Saudi Arabia, replacement of a recently matured $1bn Sukuk bond and some Eurobonds soon. In his view, the fundamentals of the economy are also showing strength as revenues grow and agriculture, services, industry and construction sectors show growth.

He was candid and diplomatic at the same time about the double whammy. He appeared incessantly parking some responsibility on the legacy he carried over from his predecessor and the recent policy directions from the central bank to which he plans to ensure full autonomy through an act of parliament within days. But then he would shrug off suggestions for accountability on the grounds that he did not believe in ‘witch-hunt’ but course correction.

The shares market has generally been in a tailspin since the International Monetary Fund announced to have reached a staff-level agreement with Pakistan’s authorities two weeks ago but a record 2,200 points plunge last Thursday alone sent a shock wave among the government rank and file. The finance adviser also accepted that there were uncertainties in the market because of double-digit inflation, currency depreciation, interest rate hike and higher import bill — a situation that was quite different at the time of the budget five months ago. The new budgetary measures would take 8-10 days to reach parliament for approval, according to Mr Tarin.

Editorial: Investors’ perceptions had as much to do with PSX bloodbath as worsening economic indicators

Shaukat Tarin conceded policy fault lines while reporting that the biggest $508m contribution to the $1.4bn higher import bill was fuel imports of products that could be produced locally

He conceded policy fault lines while reporting that the biggest $508 million contribution to the $1.4bn higher than the previous month increase in imports was fuel imports — products that could be produced locally with a foreign exchange saving.

It is no less than a crime that domestic refineries keep crying over low capacity utilisation due to unnecessary imports of finished products — petrol, furnace oil, jet fuels. With no improvement in Furnace Fuel Oil (FFO) dispatches, some of the refineries have reported that they were left with no option except to curtail refinery throughput. In case there is no improvement in the upliftment of FFO in the next few days, these will be forced to shutdown distillation units one by one ultimately leading to total shutdown, they have warned.

The refineries have expressed surprise that huge volumes of FFO had been and were “being imported on one hand and on the other hand FFO from local refineries was not being lifted”. The independent power producers which are bound by their agreements to maintain FFO inventory for thirty days are also not being pushed by the regulatory authorities for uplift from local refineries. Huge circular debt piling up at Rs2.42 trillion is the key reason. This is a poor show of planning and coordination, to put it politely.

Higher international prices of crude and liquefied natural gas (LNG) are no doubt a key reason though. The oil prices are on the decline from the recent peak. The current import exposure of the petroleum sector is about $22-23bn per annum in the shape of imports of crude, finished products, LNG and liquified petroleum gas (LPG). There are few low hanging fruits but then vested interest plays a critical role.

It does not require intricate economic models to suggest maximum capacity utilisation of local refining capacity through higher crude imports rather than finished products. The ministries and cabinet committees have been wrangling over a new oil refining policy for almost a year that could have encouraged the upgradation of existing refineries and the setting up of additional refineries.

About 25 per cent lower arrangements than required LNG quantities in a timely manner also has to be taken into account. The private sector has been running from pillar to post for medium to long term terminal and pipeline capacity to arrange its own LNG import quantities but has only met with resistance.

Some savings have, however, been made in providing maximum natural gas — both local and imported — to fertiliser production as it has now been reprioritised at par with export and power sectors. It would get an uninterrupted supply of about 760mmcfd even in peak winter months to keep all fertilisers up and running. The price differential between local urea and imported one roughly works at Rs1,800 and Rs7,000 per 40kg bag.

Suddenly, the energy ministry is referring to only one business group as the panacea for all energy challenges including those relating to LPG production, virtual pipelines for LNG supplies and facilitation to additional business to business arrangements within the existing LNG terminals. The smaller groups like the compressed natural gas (CNG) sector are being pushed to bow instead of seeking their own imports. In the process, a major Japanese player which might have led to market competition through additional terminal capacity appears to have been forced out at the last moment.

Mr Tarin has also attributed prevailing anxiety in the market to the increase in the discount rate to 8.75pc by the State Bank of Pakistan along with the announcement that monetary policy frequency has been reduced from eight to six weeks and maybe further reduced to a month. Based on this direction along with inflation at 11.5pc, the market anticipated a further increase in the discount rate and expected T-Bill’s rate at 10.75pc to go up further and hence the market players increased their pricing.

He put on record that the governor state bank did not agree that banks were involved in profit-taking in the exchange rate but he had shared data along with their profitability that would hopefully convince the central bank to take action.

Published in Dawn, The Business and Finance Weekly, December 6th, 2021

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2021-12-05 19:59:16

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