NationalVOLUME 15 ISSUE # 13

Fiscal holes plugged?

Financial indicators of the country are improving with every passing month in the Pakistan Tehreek-i-Insaf government of Prime Minister Imran Khan. It appears concerted efforts to promote accountability and transparency have started bearing fruit, though the masses have been overburdened  with persistent increase in prices of essentials, gas, power and fuel after an International Monetary Fund bailout package.

International financial institutions have also recognised Pakistan’s recent financial progress. Moody’s Investor Service has upgraded Pakistan’s economy outlook from negative to stable in December. The World Bank has also acknowledged Pakistan as one of the top 10 “most improved” countries in the Ease of Doing Business Index. Pakistan’s current account deficit has narrowed 75pc to $2.153 billion in the first six months of the current fiscal year of 2020 as imports of goods declined sharply. According to the State Bank of Pakistan, the deficit was around $8.614 billion in the corresponding period of the last fiscal year. The current account deficit, which measures the flow of goods, services and investments into and out of the country, stood at $367 million in December, compared with $364 million in the previous month. Analysts say the decline in the current account deficit was driven by import compression and moderate growth in exports. Higher foreign investment and increased remittances from Pakistani workers abroad also contributed to the improvement in the current account balance. Trade data, released earlier, showed exports increased by 4.5pc to $12.391b in July-December FY20, while imports fell by 20.9pc to $22.2b in the six months of the current fiscal year.

Foreign direct investment into Pakistan surged by 68.3pc to $1.340b in July-December FY20. Foreign investment in government securities such as market treasury bills and Pakistan Investment Bonds reached $452.2 million in six months of FY20, compared with $0.1 million a year ago. Analysts say the current account gap is easily plugged by the available financial flows in the period after an increase in foreign portfolio investment and two tranches of the IMF Extended Fund Facility. The SBP, in its first quarterly report, expects the current account deficit to be 1.5 – 2.5pc of GDP in FY20, largely due to increasing benefits from import compression. “Most of the improvement in the current account has come from a reduction in the country’s import bill; exports have yet to contribute significantly, as healthy quantum gains are not supported by price trends,” the report said.

In September, Pakistan’s current account deficit dropped by 80pc to a 41-month low of $259 million, with a 111.5pc rise in foreign direct investment (FDI) and 194pc increase in private investment. With FDI of $1.34 billion during the first half of the current fiscal year, a 68.3pc increase was registered in January, compared to $796.8 million of the same period of the previous fiscal year. In February, the reserves of the State Bank of Pakistan (SBP) also hit a 21-month high at $11.586 billion. The economic positivity was also reflected by the Karachi Stock Exchange (KSE), which registered a 16-month high in February, crossing the 42,000 point mark after a cumulative increase of 13,000 points in four months.

Despite the positives, the IMF-dictated policies have badly hurt the masses. Ironically, Pakistan’s financial developments have come in the aftermath of the bailout agreement, which aimed to address a multitude of macroeconomic imbalances spearheaded by a balance of payment crisis. A delay in agreeing to the IMF terms meant that by the end of August 2019, inflation had hit an 87-month high of 11.6pc. By the time the government implemented an IMF instructed market-driven currency exchange rate, the Pakistani rupee had already lost over 50pc of its value against the US dollar. However, in the six months since the IMF bailout agreement, the Pakistani rupee-US dollar exchange rate has eased from around 165 to the current 155. While the government’s delayed response aggravated the currency exchange crisis, financial analysts argue that its foundation were laid by the previous Pakistan Muslim League-Nawaz (PML-N) government, whose Finance Minister Ishaq Dar had kept the Pakistani rupee-US dollar exchange rate artificially afloat around the 100 mark.

Rising inflation is a serious cause of concern, for the masses and the government. January saw a 12-year high inflation rate of 14.6, which the State Bank of Pakistan declared “transitory.” Critics say the IMF conditions, coupled with the government’s negligence leading up to the bailout, continue to take their toll on the masses with persistent increase in prices of gas, power and fuel. While inflation has caused a hike in the prices of commodities and food items, mismanagement has seen shortages of basic dietary ingredients like tomatoes, wheat, and sugar.

Pakistan has attempted to address the inflation through the SBP maintaining a high policy rate at 13.25pc, providing the increased interest rate as a savings incentive for the masses. However, critics argue that with the inflation being cost-push and not demand-pull, the enhanced rate won’t suffice in addressing it. Furthermore, the high interest rate is attracting overseas investment in treasury bills.

Experts say the IMF-dictated policies have steered the economy toward macro corrections despite their crushing impact on the masses. Undoubtedly, the government had inherited a worst economic crisis. It had to carry out painful reforms, made the exchange rate market-based, which led to massive devaluation and inflation.

The PTI government has made adjustments, which should have been made decades ago. It is why Pakistan lags behind regional countries and needs to approach the IMF every few years. It is hoped the fiscal developments will solve Pakistan’s economic woes permanently and it will not have to seek an IMF bailout package again. However, the government will have to take practical measures to check high prices, which have made the reform process really painful for the people.