NationalVOLUME 18 ISSUE # 03

A grim picture

The country’s expenditures are expected to remain higher than last year after additional flood-related needs while industrial output will also remain low. Pakistan also faces less than the targeted production of wheat this year. Its foreign exchange reserves are dangerously low and inflation is at its highest point. The government faces serious challenges arising out of domestic and international reasons. However, political instability in the country makes its job even more difficult.

The government claimed to reduce the value of a dollar below Rs200 after coming to power. Finance Minister Ishaq Dar also promised to bring its value down in days after assuming office. However, the rupee still has not stabilised against the dollar. It is said that dollar smuggling to Afghanistan is the biggest reason for its shortage and high value in Pakistan. However, measures have not been taken to control the smuggling to bring stability to the rupee. It also adds immensely to inflation, which is the biggest issue of the common people.

According to the latest finance ministry report, the consumer price index (CPI) inflation on a year-on-year basis will remain in the range of 23-25pc, which means people cannot hope for relief from high prices in the coming weeks. “Inflationary pressure is expected to ease out slightly on a month-on-month basis due to smooth domestic supplies, unchanged energy prices in November and a stable exchange rate,” the report added. In its policy statement, the State Bank of Pakistan said that inflation was being driven increasingly by persistent global and domestic supply shocks.

The report added that the hike in cost-push inflation could not be overlooked and it necessitated a monetary policy response. The finance ministry admitted that the targets fixed for the current Rabi-2022-23 crops seem to be challenging due to delayed sowing in the flood-affected areas. Once again, it hoped that the timely rains would impact production in the agriculture sector positively. “The delayed sowing of the wheat crop in Sindh is making it challenging to achieve the targets set for Rabi-2022-23 season,” according to the finance ministry. Pakistan already faces wheat shortages and has to rely on costly imports to meet its domestic requirements.

Another issue to worry about is slowdown in industrial activities. “The cyclical position of Pakistan’s main trading partners has deteriorated, which reflects the widening of the negative output gap. Although Pakistan’s large-scale manufacturing (LSM) cyclical component remained positive, it showed convergence to that of its main trading partners as it remained below its potential path in September 2022,” the report observed.

According to the report, in the first four months of the current fiscal year, money supply also showed negative growth. On the external front, imports stabilised roughly at relatively low levels, with the calm in international oil prices, a stable exchange rate and contained domestic demand contributing to its decline. Given the recent dynamics, and unchanged policy assumptions, imports will remain near the current low levels during the coming months. In the coming months, however, it is expected that exports will improve on account of targeted policies announced recently by the government to stimulate exports. But these dynamics may be hindered, if the economic conditions in the main export markets remain volatile and uncertain. As a result, the trade balance in goods and services has improved marginally. The acceleration in total expenditure outpaced growth in revenues. The additional requirement of expenditure on flood-related activities has brought various challenges to fiscal sustainability. A manageable current account deficit and its guaranteed financing via healthy financial inflows is required. Over the medium term, sustainable growth requires economic fundamentals based on balanced economic policies. Sufficient investment is needed to increase production capacity and productivity in the economy to realise the high growth of potential output.

The trade deficit of Pakistan widened to 24pc in November on a month-on-month basis, according to the Pakistan Bureau of Statistics. The trade deficit swelled to $2.876 billion from $2.327 billion recorded in October. On an MoM basis, trade imbalance worsened by 24pc. According to the report, imports amounted to $5.245 billion in November, whereas exports were recorded at a mere $2.369 billion. On a year-on-year basis, the difference between imports and exports declined by 42.46pc in November because the trade deficit had clocked in at $5 billion in the corresponding month last year. The trade deficit in the first five months of the current fiscal year is recorded at $14.4 billion, which is 30.14pc lower than the deficit in the same period last year, which was $20.62 billion.

Pakistan has also successfully narrowed the gap between its higher foreign expenditure and its low income by restricting imports. Consequently, the current account deficit (CAD) has declined by one-third reaching $567 million in October 2022. According to the State Bank of Pakistan, the deficit stood at $1.78 billion during the same month last year. While administrative control over imports has reduced the country’s risk of defaulting on international payments, the measure has also slowed down economic activity to a level where it is resulting in the partial closure of factories and leaving people jobless.

On the other hand, the State Bank of Pakistan’s (SBP) foreign exchange reserves dropped 4.2pc to $7.498 billion during the week ended on Nov 25, the central bank said, linking the fall to external debt repayments. The country is facing a long list of payments amounting to $32-$34b for the current fiscal year. However, the Federal Board of Revenue said that tax collection exceeded the five-month target of Rs2.68 trillion and monthly target of Rs537b in November. As per provisional figures, Rs2.688tr was collected against Rs2.33tr a year ago, an increase of over 15.3pc. The collection in November rose by 11.5pc to Rs538.2b against the target set for the month. A slight decrease of 0.16pc was recorded in inflation last week, whereas the annual inflation rate remains unchanged at 30.56pc.

The statistics show the country faces serious issues and the government needs to focus on them with complete concentration. However, it is not sure about its future as former Prime Minister Imran Khan has threatened to dissolve Punjab and Khyber Pakhtunkhwa assemblies this month. It is obvious that Pakistan cannot attain economic stability without political security.