FeaturedNationalVOLUME 17 ISSUE # 19

Can Pakistan get rid of IMF?

Finance Minister Shaukat Tarin is optimistic that Pakistan will not need another International Monetary Fund (IMF) bailout package after completing the ongoing funding facility if the country achieves a 6pc growth rate for the next fiscal year. However, Pakistan’s past experience shows that only high growth does not matter. Though Pakistan has introduced reforms and stopped keeping the rupee artificially low against the US dollar, yet its fluctuating current account deficit shows it will have to increase its exports, increase tax collection and stop reliance on remittances sent by Pakistanis abroad to avoid borrowing from national and international sources in the future.

Pakistan’s current account has been fluctuating and so are its foreign reserves, which have forced the country to seek IMF bailout packages in the past. According to State Bank of Pakistan’s (SBP) weekly report, total liquid foreign exchange reserves held by the country stood at $21.44 billion as of March 18, compared to $22.283 billion on March 11, 2022. The exchange reserves fell sharply by $844 million in a week, mainly due to external debt payments. During the period under review, the SBP’s foreign exchange reserves moved downward and reached below the $15 billion mark, while the reserves held by the commercial banks rose slightly. The SBP’s foreign exchange reserves decreased by $869 million to reach $14.962 billion as against $15.832 billion a week earlier due to external debt and other payments. Net foreign reserves held by commercial banks increased by $25 million to stand at $6.477 billion at the end of the week. The foreign exchange reserves continue to weaken after higher external debt servicing and other official payments. The government is also making efforts to build the depleting foreign exchange reserves with the support of international financial institutions and issuance of bonds in the international market.

On the other hand, Pakistan’s current account deficit decreased by 78pc to $545 million month-on-month in February, the lowest in the ongoing fiscal year. According to the State Bank of Pakistan, the deficit stood at $2.531 billion in January. “In February, the current account deficit fell sharply to $0.5b, the lowest in FY22 and only one-fifth the level in January,” the SBP noted. The deficit is also the lowest since April 2021, when it was recorded at $262 million after which it gradually rose, putting pressure on the local currency as well. Cumulatively, during the eight-month period of the ongoing fiscal year (July-February), the deficit stood at $12.1 billion compared to a surplus of $994 million during the same eight months of the previous fiscal year (FY21).

As pressure mounted, the rupee plunged and reached an all-time low at Rs181.73 against the US dollar recently. A strong dollar not only pushes up fuel prices but also leaves all essentials more expensive in a country like Pakistan, which depends heavily on imports. However, in February, Pakistan’s import bill showed some respite as the import of goods decreased to $5.166 billion, down from $6.314 billion in January.

Pakistan’s exports reached $100 million per day in February, which is an impressive record for the economy. According to the provisional figures by the Pakistan Bureau of Statistics (PBS) exports from Pakistan during February 2022 grew by 7.9pc to $2.820 billion as compared to $2.614 billion in January 2022. They increased by 36.4pc as compared to $2.068 billion in February 2021. The imports in February decreased by 2.14pc to $5.907 billion as compared to $6.036 million in January.

According to the provisional data released by the Federal Board of Revenue (FBR), it exceeded the target of Rs3.53 trillion by Rs268 billion and collected Rs3.79 trillion for the first eight months of the current fiscal year. The revenue collection in February stood at Rs443.3 billion, which is Rs2.3 billion higher than the target of Rs441 billion. In comparison to the last year, tax collection increased by 29pc in February from Rs345 billion to Rs443 billion. The new revenue target of the government is Rs6.1 trillion.

Despite the positives, Pakistan continues to face internal and external pressures which started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate which also reinforced domestic price pressures. According to the IMF, Pakistan’s economy is set to keep on recovering in the current fiscal year, with real GDP growth projected at 4pc. In its latest report, the IMF warned Pakistan that inflation in the country was “expected to pick up this year before gradually slowing down.” It also reminded Pakistan that “continued commitment to a market-determined exchange rate and a prudent macroeconomic policy mix will help reduce the current account deficit, and ease external pressures over the medium term.” It urged Pakistan to make extra efforts to revitalise its economy, noting that recent policy adjustments in Pakistan were “appropriate to address these challenges” and maintain economic stability. “Further ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy will help unlock sustainable and resilient growth,” it noted.

The latest economic indicators show that Pakistan can easily avoid the IMF for its financial needs in the future if it continues its efforts for structural impediments. The country will have to improve and diversify its exports to earn more dollars to meet its needs and provide basic facilities to its people.