FeaturedNationalVOLUME 18 ISSUE # 18

Deepening uncertainties

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 shrank by 33.18pc during the first eight months (July-February) of the current fiscal year, i.e. FY23, to clock in at $21.3 billion compared to the $31.88 billion recorded in the same period last year. According to the monthly statistics on trade by the Pakistan Bureau of Statistics (PBS), a massive cut was observed in imports after steps were taken by the government to ease pressure on the import bill during the first seven months of FY23. Imports amounted to $40.093 billion during the period compared to the $52.452 billion that had been recorded during the same period last year. Exports, however, also fell during the time to clock in at $18.793 billion from $20.573 billion recorded last year. In February alone, the trade deficit shrank 43.56% on a year-on-year basis, as the trade imbalance amounted to $1.704 billion compared to the $3.019 billion that was recorded last year.

Pakistan’s current account deficit (CAD) also hit a two-year low of $74 million in a month, narrowly failing to turn around the country’s deficit into surplus in February. The government achieved the significantly low deficit through limiting imports to manage with low foreign exchange reserves and high risk of default on foreign debt repayments. The low imports, however, slowed down economic activity next to nil and left millions of people jobless in the country. The State Bank of Pakistan (SBP) reported that “the current account deficit (was) recorded at $0.1 billion in February 2023 against a deficit of $0.5 billion in February 2022. “Cumulatively, the deficit reduced to $3.9 billion in eight months (July-Feb FY23) compared to a deficit of $12.1 billion in July-Feb FY22,” it said..

Pakistan’s foreign exchange reserves reached $4.8bn after China refinanced $500mn. The reserves, however, are barely enough for one month of import cover and not enough to make the due repayment of around $7bn over the next four months (Mar-June FY23).

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 launched a movement against it. It is obvious that Pakistan cannot attain economic stability without political security.