FeaturedNationalVOLUME 15 ISSUE # 04

A promising start

The International Monetary Fund (IMF) believes Pakistan’s economic programe is off to a promising start in spite of domestic and international risks and structural challenges. No doubt, some indicators are encouraging but inflation is still the biggest problem of the people of the country and there is no sign of relief from it in the near future.

The most depressing scenario for the common people is that the State Bank of Pakistan (SBP) has projected that inflation, the worst ever in the country’s history, would remain at an elevated level for two more years. Pakistan’s inflation rate touched the 87-month highest level of 11.6pc last month as a result of higher energy and food prices. According to the new methodology of the Pakistan Bureau of Statistics (PBS), inflation has shown rising trends. Inflation, with new base year (2015-16), has increased by 10.49pc, the highest in 69 months. Under the old methodology, inflation has reached seven years and three months (87 months) high of 11.6pc in August 2019, over the corresponding period last year.

On the other hand, the IMF says Pakistan’s near-term macroeconomic outlook is broadly unchanged from the time of its programme approval, with growth projected at 2.4pc in FY2019/20 and inflation expected to decline in the coming months, and the current account adjusting more rapidly than anticipated. An IMF delegation, which was in Pakistan recently, noted the authorities’ economic reform programme was still in its early stages while acknowledging that there had been progress in some key areas. “The transition to a market-determined exchange rate has started to deliver positive results on the external balance, exchange rate volatility has diminished, monetary policy is helping to control inflation, and the State Bank of Pakistan has improved its foreign exchange buffers”.

The IMF mission also noted “a significant improvement” in tax revenue collections, with taxes showing double-digit growth net of exporters’ refunds. The mission was also satisfied with the performance of the country on the energy front when it was informed that circular debt had shown a considerable reduction in its growth. It had been growing by Rs38 billion a month, but in eight months its growth at the end of the last financial year was reduced to Rs26b per month. In July, the results were even more encouraging as the growth further fell to Rs18b per month after a hectic campaign against power theft and defaulters.

Pakistan’s foreign inflows have almost doubled in the first two months of the current fiscal year. It has secured $1.622 billion foreign inflows in July and August, almost 100pc higher than $820 million last year. According to the Economic Affairs Division, Pakistan received about $919m (Rs146b) from multilateral lenders, $321.5m (Rs51.7bn) from commercial loans and $382m (Rs61b) from bilateral lenders. The full year target of foreign inflows is Rs3.032 trillion (about $19b) against last year’s budget target of $9.7b (Rs1.113 trillion).

Pakistan’s trade deficit has also narrowed by 35.86pc year-on-year to $3.924 billion in the first two months of the current fiscal year as imports have decreased considerably on regulatory measures and slowdown in oil shipments, while exports slightly increased during the period. The Pakistan Bureau of Statistics (PBS) said imports fell by 21.41pc in July and August, year-on-year to $7.677 billion, while exports rose by 2.79pc to $3.753 billion. In August, trade deficit contracted by 38.98pc year-on-year to $1.799 billion with both imports and exports down by 26.26pc and 7.65pc, respectively. Compared with July, trade deficit shrank by 15.34pc in August as imports fell by 8.98pc and exports decreased by 1.85pc.

The current account deficit of Pakistan has also shrunk by a massive 55pc in the first two months of the current fiscal year as compared to the corresponding period last year. According to the State Bank of Pakistan (SBP), the deficit reduced by $1.56b to $1.29b in the two months, from $2.85b during the same period last year. It comes as a big relief for the government which has been struggling to plug the deficit through borrowing from donor agencies, commercial banks and friendly countries. The major cause of the shrink is the decline in the trade deficit. According to the commerce ministry, exports jumped to $3.738b in the two months, as compared to $3.650b during the same period last year, showing an increase of 2.41pc or $88 million. Similarly, imports for the period declined to $7.553b as compared to $9.768b during the same period last year, showing a decline of 22.68pc or $2.215b. In total, the trade deficit for the two months stood at $3.815b as compared to $6.118b during the corresponding period last fiscal year. Experts say the heavy reduction in the current account deficit will also help the State Bank of Pakistan accumulate its dollar reserves which have failed to hit double digits despite continued inflows from friendly countries and donor agencies. It will also help bring stability to the exchange rate and provide support for both import-reliant and domestically sufficient manufacturers.

Despite the positive indicators, the forecast for inflation is depressing as the SBP forecast it would come down to its targeted rate of 5-7pc after two years. Experts say inflation could not be contained until the government reversed its decision to increase electricity and gas tariffs, cut sales tax on petroleum products and restore transport subsidies. Businesspeople say factories are reducing the number of work shifts, because of the high cost of doing business and low demand, which would eventually affect supply chains. Due to the factors, the business community fears a second round of inflation after October. If it happens, people may react sharply to it.