NationalVOLUME 17 ISSUE # 48

Fault lines widen

Concerns are growing about Pakistan’s ability to meet its international obligations after its foreign currency reserves have dipped to a record low; the rupee is shedding its value against the dollar and its sovereign bonds have lost more than 60pc of their value this year. It appears that floods have widened cracks in the economy, which successive governments failed to plug.

The government is restricting imports to keep the dollar value artificially low. It is feared the dollar will touch record heights after the restrictions are lifted. The rupee registered a decline for the fourth successive session against the US dollar, and depreciated 0.21% in the inter-bank market on October 17. According to the State Bank of Pakistan (SBP), the rupee closed at 218.89 after depreciating Re0.46 or 0.21%. On the other hand, foreign exchange reserves held by the State Bank of Pakistan (SBP) continued to fall for the third week in a row, declining by 3.83pc. On October 7, the foreign currency reserves held by the SBP were recorded at $7,596.9 million, down $303 million compared with $7,899.8 on September 30, data released by SBP showed. Overall liquid foreign currency reserves held by the country, including net reserves held by banks other than the SBP, stood at $13,246.8 million. Net reserves held by banks amounted to $5,649.9 million. The central bank cited external debt repayment, including interest payments on Eurobonds and repayment of a commercial loan as a major reason behind the decline. With the current foreign exchange reserves position, Pakistan has an import cover of fewer than 1.5 months.

Renowned economist Steve Hanke has warned that Pakistan is on the brink of a “debt default”. “Pakistan’s sovereign bonds have lost more than 60% of their value this year. I’m not surprised,” he wrote on his official Twitter handle. Though many experts rubbish his fear, yet no one denies Pakistan faces even tougher conditions ahead.

The International Monetary Fund (IMF) has forecast Pakistan’s GDP growth rate at 3.5pc and inflation at around 20pc with a disclaimer –- “the 2022 projections for Pakistan are based on information available as of the end of August and do not include the impact of the recent floods.” It also further lowered its global economic growth forecast to below 2pc amid stubborn higher inflation with a warning that the worst was yet to come. In its World Economic Outlook (WEO) 2023 – Countering the Cost-of-Living Crisis, it projected Pakistan’s current account deficit at 2.5pc of GDP for the current fiscal year against 4.6pc of last year and the unemployment rate at 6.4pc. The IMF said its forecasts project global growth to slow from 6pc in 2021 to 3.2pc in 2022 and go further down to “2.7pc in 2023 – 0.2 percentage points lower than the July forecast – with a 25pc probability that it could fall below 2pc”.

According to the estimates, more than a third of the global economy will contract this year or next, while the three largest economies—the United States, the European Union, and China—will continue to stall. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession”, it said, adding Russia’s invasion of Ukraine continued to powerfully destabilise the global economy. It advised global policymakers to keep a steady hand as storm clouds gather. It attributed the steep economic challenges facing the global economy to the lingering effects of three powerful forces — the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.

The WEO forecast the global inflation to rise from 4.7pc in 2021 to 8.8pc in 2022 but to decline to 6.5pc in 2023 and to 4.1pc by 2024. Upside inflation surprises have been most widespread among advanced economies, with greater variability in emerging markets and developing economies. “It is the time for emerging market policymakers to batten down the hatches. Eligible countries with sound policies should urgently consider improving their liquidity buffers by requesting access to precautionary instruments from the IMF. At the same time, the countries should also aim to minimize the impact of future financial turmoil through a combination of preemptive macroprudential and capital flow measures, where appropriate as too many low-income countries were in or close to debt distress,” it suggested.

The IMF said the progress toward orderly debt restructurings through the Group of Twenty’s Common Framework for the most affected was urgently needed to avert a wave of sovereign debt crisis. “Time may soon be running out,” it warned. The WEO noted that the energy and food crises, coupled with extreme summer temperatures, starkly remind all of what an uncontrolled climate transition would look like. “Much action is needed to implement climate policies that will ward off catastrophic climate change”, it added.

It said fiscal policy’s priority was the protection of vulnerable groups through targeted near-term support to alleviate the burden of the cost-of-living crisis felt across the globe. “But its overall stance should remain sufficiently tight to keep monetary policy on target. Addressing growing government debt distress caused by lower growth and higher borrowing costs requires a meaningful improvement in debt resolution frameworks. With tightening financial conditions, macroprudential policies should remain on guard against systemic risks. Intensifying structural reforms to improve productivity and economic capacity would ease supply constraints and in doing so support monetary policy in fighting inflation.”

It highlighted that risks to the outlook remain unusually large and to the downside. “Monetary policy could miscalculate the right stance to reduce inflation. Policy paths in the largest economies could continue to diverge, leading to further US dollar appreciation and cross-border tensions. Also, more energy and food price shocks might cause inflation to persist for longer. Global tightening in financing conditions could trigger widespread emerging market debt distress.

The report shows that all leading world economies will slow down and the worst is still to come. It will also badly affect Pakistan. However, Pakistan’s woes have been worsened by persistent flaws and weaknesses in the economy, which have become more visible after the floods.