NationalVOLUME 14 ISSUE # 21

Another addition to PTI’s bad records

The Pakistan Tehreek-i-Insaf (PTI) government has set another bad record by hiking fuel prices to an unprecedented level in the country’s history. Inflation, the rate of dollar against the Pakistan rupee and loans obtained in 10 months by any government are already the highest in Pakistan’s history.


When the government increased the prices of petroleum products by up to 4pc for the month of June, they touched the highest-ever mark in the country’s history. The hike came despite a cut in the international crude market price of $67 a barrel, which is almost half of the 2008 highest record of $147, when retail prices stood below Rs80 per litre. The crude price had dropped by 7pc in the Arabian Gulf market — the source of Pakistani imports — over the last month from $72 on April 28 to $67 per barrel on May 29, but the currency devaluation caused the major negative impact. New prices of petrol and high speed diesel are Rs112.68 and Rs126.82 per litre, respectively.

Earlier, the Pakistani rupee fell to record lows in recent weeks after the government agreed to a $6 billion loan from the International Monetary Fund. At a point, the rupee was sold at Rs152 to a US dollar in the interbank market which was unprecedented. Pakistan’s benchmark stock index erased half its market value over the past two years as the deterioration in the economy prompted rating agencies to downgrade the nation. The currency has plunged more than 20pc in the past year, the worst performer in a basket of 13 currencies in Asia. The rupee depreciated by 29pc in May alone. The currencies of Afghanistan, Bangladesh and Nepal are stable in comparison with Pakistan’s.


Analysts say the way the PTI government has launched a borrowing spree in the world, it will surpass the previous Pakistan Muslim League-Nawaz (PML-N) government in loan growth in just three years. According to estimates, the PTI government is projected to add over Rs10 trillion to public debt during its first three years, due to rigidity in expenditures, increase in interest rates and currency devaluation. The debt will be equal to the burden added by the PML-N in its five years. According to the government’s own estimates, the debt to the GDP ratio will remain closer to 70pc by June 2021, which could be lower than the level left by the PML-N but far higher than the target set in the Fiscal Responsibility and Debt Limitation Act of 2005. When the PML-N government completed its term in 2018, public debt was Rs24.95 trillion, according to the State Bank of Pakistan (SBP). During the Pakistan Peoples Party (PPP) tenure (2008-2013), public debt surged from Rs6 trillion to Rs14 trillion. During the next five years of the PML-N, it hit the Rs25 trillion mark. By the end of June, public debt could hit Rs29.4 trillion, equal to 75pc of GDP.


The massive hike in fuel prices has added to inflation, which has already surged to an unprecedented level. Consumer prices, influenced by faster rupee depreciation and rise in energy prices, have already increased to their highest level in five years. The average inflation during the July-March period rose by 6.79pc on a yearly basis. The government is expecting the inflation rate to remain on the higher trajectory over the next couple of years owing to second-round effect of currency depreciation, higher energy prices, rising commodity prices in international market and base money creation. Average inflation is expected to be 8.5 per cent in the next fiscal year (2019-20) that may touch 10pc by fiscal year 2020-21. An expected increase in energy and petroleum prices in July will also add to the problem.


Despite the odds, Fitch Solutions, a US-based global research house, expects stability to return to Pakistan’s economy after the government has made two tough decisions recently. The research arm of Fitch Ratings said in a report that the 150 basis point interest rate hike would support stabilisation in inflation over the coming months. “In particular, the interest rate hike has brought the real interest rate firmly into the positive territory of around 3.5pc, which should help to stabilise the rupee and hence the prices of imported goods. It forecast the State Bank of Pakistan (SBP) to maintain its benchmark interest rate at 12.25pc throughout 2019,” it observed.


The SBP earlier announced a 150 basis points increase in its benchmark interest rate to 12.25pc following a 5.7pc devaluation of the rupee to around Rs148 per dollar on May 17, from around Rs140 previously. Fitch Solutions said higher interest rates and a more stable currency would ease consumer price inflation, which has already started to fall slightly to 8.8pc year-on-year in April from 9.4pc year-on-year in March. “We believe that the recent hikes will be able to counter the inflationary pressure resulting from rising oil prices. Accordingly, we forecast inflation to stabilise to an average of 7pc in FY20, slightly higher than SBP’s target of 6pc for FY19, but considerably lower from the 8.8pc year-on-year recorded in April,” it noted. It forecast Pakistan’s growth to slow over the near term, given the aggressive hike in interest rates. “In addition to the likely fiscal consolidation measures agreed as part of the International Monetary Fund’s extended fund facility deal, the 150 bps interest rate hike will discourage investment as well as consumer spending.”


Despite a plethora of bad news, people have still not lost hope from the government and believe it will improve its performance in coming days, though they have received one setback after the other in the first 10 months of Prime Minister Imran Khan’s government.