FeaturedNationalVOLUME 17 ISSUE # 44

Elusive stability

The confidence of investors in Pakistan’s economy has not been restored even after the revival of the International Monetary Fund package. Yields on Pakistan’s international bonds and Sukuk have increased in global markets; the rupee continues to fall against the US dollar, while foreign direct investment is also declining rapidly. On the other hand, prices of food and essentials are at a historic high while recent floods have compounded the problems of the country and its people.

International investors’ trust in Pakistan’s bonds has waned significantly over recent national and global developments, including the strengthening of the US dollar against global currencies, high inflation in the world and its fallout in Pakistan, depreciation of the rupee, and low foreign exchange reserves in the country. Sukuk yields have risen sharply and touched 39pc recently. The yield of another international bond of 10 years, worth $1 billion, which will mature on April 15, 2024, has already touched 42pc.

On the other hand, net foreign direct investment in the financial year 2021-22 stood at merely $1.87 billion as compared to $1.82 billion in 2020-21. According to the State Bank of Pakistan, the net FDI of just $59 million in July was almost half as compared to $104 million in the same month of last year. Going at this rate, it would be difficult even to maintain the last year’s FDI level. Pakistan needs to enhance its FDI to at least $10 billion to deal with the current economic challenges.

Meanwhile, the rupee continues to lose its value against the US dollar. The government believed that the currency would recover and the dollar would fall below Rs200 after the IMF package was revived. However, the situation has not changed even after receiving $1.16b. International and national estimates say the dollar will settle at over Rs250 or even more. Both exporters and importers are facing troubles because of the rupee’s falling value. According to the Forex Association of Pakistan, the rupee is declining because of the rising import bill. According to the Pakistan Bureau of Statistics, Pakistan’s oil and edible imports grew by 11.4pc in the first two months of the current fiscal year to $5.08 billion from $4.56b a year ago. The oil import bill increased by over 7pc to $3.30b in July-August from $3.08b over the corresponding months of last year. The food import bill rose by over 21pc to $1.78b in the two months under review from $1.47b a year ago to bridge the local production gap.

Pakistan’s goods exports jumped by 11.6pc year-on-year in August 2022 compared to the same month last fiscal year, while imports contracted by 8.26pc to $6.03 billion from $6.577 billion in August 2021. In July, the exports dropped by 5.17pc; however, the export proceeds bounced back to $2.5 billion in August against $2.24 billion in the same month last year. On a month-on-month basis, the export proceeds increased by 11pc. Pakistan’s current account deficit also posted a massive 45pc month-on-month decrease at $1.21 billion in July 2022 in comparison to a deficit of $2.2 billion in June. “The narrower deficit is the result of wide-ranging measures taken in recent months to moderate growth and contain imports, including tight monetary policy, fiscal consolidation and some temporary administrative measures,” the State Bank of Pakistan said.

However, the finance ministry has warned that the economic outlook is surrounded by global and domestic uncertainties, including lower growth, especially in the wake of recent heavy rains and floods affecting crops as well as elevated inflation. It has also warned that recessionary tendencies may hurt Pakistan’s export markets in the coming months. “The economic outlook is surrounded by global and domestic uncertainties. Geopolitical tensions remain unabated, worldwide inflation remains high, interest rates show tendencies to rise, and the US dollar strengthens. Pakistan’s external environment is, therefore, facing increasing challenges,” the ministry noted in its monthly economic update. “Domestically, the government has taken necessary measures to comply with IMF requirements. These have further increased inflation, but also have the positive effect of alleviating the external financing constraints. Recent floods caused by abnormally heavy monsoon rains have adversely affected important and minor crops which may impact the economic outlook through agriculture performance. Inflation has continued to accelerate in recent months, mainly due to supply shocks that have created very significant monthly impulses on the CPI level. If these monthly impulses can be contained to more normal levels in future months, inflation may start to decelerate,” it observed.

Pakistan fears that floods might have caused over $40 billion in economic losses and damages. Fitch Solutions has revised Pakistan’s real GDP growth forecast for the fiscal year 2022-23 down to 0.2pc, from 0.6pc previously, while stating that the severe floods in Pakistan would weigh on agricultural production and exacerbate the country’s external imbalances. In its latest report, Fitch Solutions said a reduction in crop production would also likely lead to higher inflation, which in turn could prompt the State Bank of Pakistan (SBP) to tighten monetary policy even more aggressively than what is currently expected. It expects floods in Pakistan to exacerbate the already weak economic outlook and political situation. “On the economic front, we have lowered our real GDP growth forecast for Pakistan to 0.2pc for 2022-23 (July – June), from 0.6pc previously, as adverse weather conditions will not only reduce agricultural production which accounts for 19pc of GDP but also weigh on exports and exacerbate Pakistan’s external imbalances,” it noted.

Pakistan’s exports are already not enough to meet its international and national needs. It is feared that exports will drop in the coming weeks and months, which will widen the current account deficit and put more pressure on foreign reserves. Foreign direct investment in the country is also declining. The political crisis is contributing immensely to economic instability. In this situation, all stakeholders should sit together to evolve a consensus to improve the national economy.