With a depreciating rupee, declining exports and dwindling foreign exchange reserves, Pakistan’s economy ends the year 2022 in a state of deep depression. The government is trying to borrow right and left but no short-term relief is in sight.
In the last eight months the rupee has lost 27 percent of its value against the dollar and the downslide continues unabated. The Stock Exchange is daily slipping while gold has touched its highest peak ever in the last five years. Food inflation has gone through the roof and an atta shortage is also feared in the coming days.
The closing months of 2022 witnessed an unprecedented price hike amid the deteriorating balance of payments crisis exacerbated by devastating summer floods and their after-effects. Experts predict inflation to spike further in 2023 and the economy to sink deeper into recession.
The government pins its hope on the IMF bailing it out but the prospects in this regard are not very bright. The resumption of the IMF loan programme is essential to overcome its dollar liquidity crisis but there are hurdles in the way. The IMF is pressuring the government to further cut spending, raise electricity and gas prices, and impose additional taxes. But the government, already unpopular, is not ready to pay the political price for these decisions.
So, the government finds itself between a rock and a hard place. In the meantime, the State Bank’s liquid foreign exchange reserves have plunged to their eight-year low to just above $6 billion. Foreign inflows have dried up over concerns regarding the government’s capacity to timely make its foreign debt payments. The situation will not improve until the IMF agrees to disburse the next tranche of $1.2bn.
The Fund has postponed the ninth performance review of the bailout, which was originally scheduled for the end of October on differences over Islamabad’s post-flood fiscal projections for the current financial year. Pakistan has twice renegotiated the programme with the IMF in the last year but without any fruitful results. The IMF programme is the key to let other multilateral, bilateral and commercial creditors in. So there is a hold-up which has led to the top three global credit agencies downgrading Pakistan’s ratings into junk category because of its growing external vulnerabilities in recent months.
The IMF loan programme was originally signed in the summer of 2019 but was subsequently suspended several times over various issues. Later differences emerged between Islamabad and the lender over the unmet fiscal and other targets in the aftermath of the devastating floods that hit a third of the country and caused economic and infrastructural losses of over $30bn. In the meantime, Pakistan also suffered from international shocks resulting from higher prices of oil, gas, food and other commodities which it imports in huge quantities.
External factors aside, the basic problem is Pakistan’s failure to manage its financial and fiscal resources in a balanced manner. This has led to recurring balance of payments crises which we have tried to meet with foreign loans which have now become unsustainable. As a result, Pakistan today is one of the most indebted nations of the world.
The average fiscal deficit during the last four years has been 7.23pc of GDP, with the current account gap touching almost 5pc of GDP. The chickens have now come home to roost because of extreme political instability, rising global commodity prices and drying foreign inflows.
The IMF estimates the country’s external financing needs during the present fiscal year at nearly $34bn. The government claims that over the next few months it expects increased financing from various multilateral and bilateral lenders, including friendly countries like Saudi Arabia, China and the United Arab Emirates. But people in the know are skeptic. Nobody is ready to believe State Bank of Pakistan Governor Jameel Ahmed who claims that Pakistan’s full-year financing requirements of $32-34bn are fully covered and that the reserves will start building up in the first half of 2023.
Most experts are of the view that if emergency rescue measures are not taken, Pakistan may be near default in the starting months of 2023. It is time for the government to fasten its seat belt and take tough decisions like raising tax revenue, especially from fat cats sitting pretty in their feudal fiefdoms and robber barons in the corporate world. Equally important is the need to cut waste and end corruption which eats up almost half of all official expenditures.
But the question is: whether the government is prepared to meet the challenge of economic emergency? There is grave doubt in this regard as the people at the helm of affairs now are the same lot who with their acts of omission and commission in the past are responsible for the present mess.