FeaturedNationalVOLUME 19 ISSUE # 11

A complex economic scenario

The economic landscape of Pakistan is currently marked by a series of challenges and projections that warrant careful consideration. This overview delves into key indicators, including surging gas prices, shifting remittance patterns, and the intricate dynamics of the nation’s trade balance. Furthermore, the assessment by the International Monetary Fund (IMF) provides insights into crucial aspects such as net international reserves (NIR), current account deficit (CAD), trade balances, and external debt.

The International Monetary Fund (IMF) has projected that Pakistan’s foreign exchange reserves, managed by the State Bank of Pakistan (SBP), will reach $9 billion by the end of the current fiscal year. Despite not anticipating a deficit in the external account, the IMF expressed concern about a potential decrease in overseas remittances, revising the earlier target from $32.889 billion to $29.377 billion for the fiscal year ending on June 30, 2024. Additionally, the IMF indicated a possible increase in the oil import bill from $15.3 billion to $17.63 billion for the same fiscal year.

This forecast implies that following the expiration of the ongoing $3 billion Standby Arrangement (SBA) program, Pakistan will need to negotiate another medium-term IMF program before the budget for the next fiscal year, 2024-25. As of November 24, 2023, the SBP reported a notable week-on-week increase of $77 million (1.07%) in foreign exchange reserves, reaching $7,257.0 million. The source of this improvement was not disclosed by the SBP. The total liquid foreign currency reserves, including those held by commercial banks, amounted to $12,392.8 million, with net foreign reserves held by commercial banks standing at $5,135.8 million.

Despite a 5.34% month-on-month increase in remittances, totaling $2.21 billion, attributed to improved transparency and measures against dollar smuggling, there was an 11.3% year-on-year decline in workers’ remittances for September. The total remittances for the first three months of the fiscal year 2023-24 were $6.33 billion, representing a 19.85% decrease compared to the same period in the previous fiscal year. Key remittance-contributing countries included Saudi Arabia, the UAE, the U.K., EU countries, and the USA, showcasing their continued support to Pakistan’s economy.

The decline in remittances during the previous month was mainly attributed to a widening gap between official and unofficial exchange rates. Many non-resident Pakistanis chose unofficial channels that offered a higher exchange rate per dollar, contributing to the decline.

In response to these challenges, Pakistani authorities, led by the army, initiated crackdowns against speculators, hoarders, and smugglers to curb illegal dollar outflows. This has resulted in a strengthening of the Pakistani rupee (PKR) against the US dollar (USD) in the official market.

Furthermore, the State Bank of Pakistan (SBP) implemented reforms aimed at consolidating and transforming various types of exchange companies into a single category with stricter regulations and higher capital requirements. These reforms enhance transparency within the remittance industry and strengthen regulatory oversight.

As part of these measures, the SBP suspended the authorization of four exchange companies in September, underscoring the central bank’s commitment to enforcing regulatory standards and ensuring the security of remittance transactions.

In October, Pakistan’s trade deficit expanded to $2.099 billion, marking a 38.27% month-over-month (MoM) deterioration from the previous month’s deficit of $1.518 billion, according to data released by the Pakistan Bureau of Statistics (PBS). Despite this monthly setback, there was a glimmer of optimism when compared to October 2022. The trade deficit showed a 4.46% improvement as it stood at $2.2 billion.

October saw exports increase by 9.33% MoM to $2.71 billion, a positive shift from the $2.48 billion recorded in September 2023. The year-on-year (YoY) comparison was even more favorable, with exports rising by 13.55% compared to October 2022.

However, the rise in imports during the review month was a notable factor contributing to the widening trade deficit. Imports surged by 20.33% MoM, reaching $4.81 billion compared to the previous month’s $4 billion. In a YoY context, imports increased by 4.91% in October 2022, amounting to $4.58 billion.

Looking at the cumulative data for the first four months of Fiscal Year 2024, there is a positive trend. The trade deficit improved by 34.70% YoY, falling to $7.42 billion when compared to the $11.36 billion reported in the same period during the previous fiscal year. This suggests encouraging development in Pakistan’s trade dynamics.

In the week ending November 30, Pakistan witnessed a staggering 41% surge in weekly inflation, as measured by the Sensitive Price Indicator (SPI), primarily attributed to a substantial hike in gas prices in the preceding month compared to the same week last year, according to the Pakistan Bureau of Statistics (PBS).

While the weekly inflation figure did show a 0.23% decline on a week-on-week basis, marking a second consecutive week of decrease, the lingering impact of the multiyear high recorded in the second week of November continued to influence the trajectory.

On a year-on-year basis, gas prices experienced an alarming surge of 1,108.59% during the reviewed week compared to the corresponding period in the previous year. Other notable increases included a 94.20% rise in cigarette prices, an 87.27% increase in wheat flour costs, and an 81.74% uptick in chili powder prices.

The IMF’s assessment indicates that Pakistan’s Net International Reserves (NIR) are projected to stand at a negative $11 billion by the end of June 2024. The NIR target for the end of September was envisioned at a negative $14.5 billion, and for the end of December 2023, it was set at a negative $13.8 billion. The percentage of remittances in relation to GDP is expected to decline from 9.4% to 8.4% for the current fiscal year. The IMF predicts that remittances will amount to just $31 billion, equivalent to 8.4% of GDP in the next financial year, 2024-25.

The Current Account Deficit (CAD) was revised down from the earlier projection of $6.42 billion to $5.6 billion for the current fiscal year, following discussions between Pakistan and the IMF, culminating in the Staff Level Agreement (SLA) under the Standby Arrangement (SBA) program.

The trade balance on goods was reduced from $33.857 billion to $27.781 billion for the current fiscal year, with an export target set at $30.627 billion. Imports were adjusted from $64.7 billion to $58.408 billion for the current fiscal year. The IMF’s projection indicates an increase in foreign direct investment from $847 million to $1.07 billion for the current fiscal year.

One positive development highlighted by the IMF is the potential decrease in external debt from $130.8 billion to $123.556 billion for the current fiscal year. Additionally, the gross external financing needs are projected to decrease from $28.361 billion to $24.98 billion.

In conclusion, Pakistan faces a complex economic scenario, with notable fluctuations in key sectors. The alarming surge in gas prices and the shifting landscape of remittances pose challenges, while the IMF’s projections offer a glimpse into the nation’s fiscal future. Amid concerns, positive developments, such as the potential decrease in external debt and the upward trajectory of foreign direct investment, provide glimmers of hope. As Pakistan navigates these economic currents, strategic reforms and prudent measures become imperative to foster stability and sustainable growth in the coming fiscal years.