On growing hope and despair.

Tax revenue collection remains behind the target and the fiscal deficit is growing, forcing the federal government to borrow excessively from commercial banks at high rates of return.

Between July 1 and October 21, the federal government borrowed Rs824 billion, while tax collection during July-October totalled Rs2.144 trillion against the target of Rs2.148tr. The cost of bank debt is growing. (The cut-off yield on six-month treasury bills rose from 14.8 per cent at the end of June to 15.74pc on October 19).

This means that the government will have to spend larger sums of money on domestic debt servicing - and that will leave little for development spending for future economic growth and job creation.

In October 2022, initially estimated tax revenue remained 17pc lower than the target as political chaos spread across the country and the collection of import duties fell. Tax collection at the import stage is falling due to the tariff and non-tariff restrictions on imports - imposed to contain the import bill - remain in place. Imports are coming down, however, and the trade deficit is shrinking.

The cruel truth is that as more and more sectors of the economy feel the pinch of the floods, demand will decline and headline inflation will ease

Since the trade deficit is down solely due to reduced imports, its sustainability is under question. Export earnings remain almost stagnant despite numerous incentives offered to exporters. Forex markets are smart. They know that the reduction in the trade deficit (of $4.2bn or 26.6pc in July-October 2022) is qualitatively poor - exports grew just around 1pc during this period - and, hence, unsustainable.

That is why news of the slashed trade deficit had no impact on the rupee's health. The good news about possible Chinese forex support during Prime Minister Shahbaz Sharif's two-day visit also had no impact on the exchange rate.

Unless the promises made by China translate into tangible actions and expected bilateral debt relief and fresh forex inflows become visible, the rupee will continue to reflect the current state of poor forex supply in the market.

The November 3 assassination attempt on Imran Khan during the PTI's 'long march' and the protests and agitation that ensued afterwards have aggravated the existing political chaos. How this will affect the forex market and exchange rate in the coming days and weeks is anybody's guess.

Meanwhile, the State Bank of Pakistan has allowed forex companies to...

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