FeaturedNationalVOLUME 17 ISSUE # 13

Growth momentum challenges

Higher commodity prices, a low export-to-GDP ratio and savings rate are the biggest challenges of Pakistan to sustain its growth momentum. The country also faces a chronic issue of current account deficit which starts widening when GDP growth improves.

As Pakistan has revised up its economic growth rate to 5.37pc from 3.9pc for 2020-21, its year-on-year trade deficit widened by 106.4pc to $25.478 billion in July-December, driven largely by imports which increased thrice as compared to exports. According to the Pakistan Bureau of Statistics, the trade deficit increased for the six consecutive month, owing to an unprecedented increase in the import values while the exports stagnated between $2.5b and $2.8b a month. The import bill in July-December 2021 rose by 65.94pc to $40.580b against $24.454b over the corresponding months last year. In December 2021, the import bill edged up to $7.597b from $4.986b over the same month last year, reflecting an increase of 52.37pc. Despite achieving the export target for the first half of the current fiscal year, Pakistan’s export growth failed to outpace the expansion in imports. According to the ministry of commerce, exports amounted to $15.125 billion for July-December 2021 against the target of $15 billion.

On the other hand, remittances from Pakistani workers employed abroad surged to $15.8 billion in the first six months of the current fiscal year, 11.3pc higher than a year earlier. It appears the government has pinned too many hopes on the remittances to contain the current account deficit. In its last monthly report, the finance ministry said, “Assuming stable remittance inflows, the expected improvement in the trade balance will be reflected in declining current account deficits, such that these deficits remain manageable and financeable.”

The ministry admitted the current account had posted a deficit of $7.1 billion (5.3pc of GDP) for Jul-Nov FY2022 as against a surplus of $1.9 billion (1.6pc of GDP) last year. Previously, the current account deficit was $7.2 billion (5.5pc of GDP) during Jul-Nov FY2018. “The current account deficit widened due to the constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global prices of oil, COVID-19 vaccines, food, and metals,” it noted.

However, State Bank of Pakistan Governor Reza Baqir believes the country has the capacity and financial cushion to ride out rising external account pressures being driven by a surge in global commodity prices. “Two thirds of the rise in the trade deficit over the past few months had been driven by surging global commodity prices. One third of our typical import payments on any given day are oil payments which have risen sharply in recent months.” He believes the pressure should ease soon as central banks around the world tighten monetary policy, which is likely to curb rebounding global demand. He said the surge in global commodity prices over the past few months was being driven by a sharp recovery in demand as economies bounced back from a COVID-induced slump. “But as central banks begin to turn hawkish, it is going to moderate global demand growth; that in turn is what is going to bring down international commodity prices,” he reasoned.

A massive depreciation of the rupee has also fuelled import-led inflation. Pakistan recorded the highest consumer prices in two years as inflation rose up to 12.3pc in December. According to the Pakistan Bureau of Statistics (PBS), the Consumer Price Index increased by 12.28pc on a year-on-year (YoY) basis during December 2021, against the corresponding month of last year. The average CPI-based inflation rate during July and December was recorded at 9.81pc over the same period of the preceding year. The Urban CPI recorded an increase of 12.74pc on a year-on-year basis while it increased by 0.3pc on a month-on-month basis. Rural inflation increased by 11.61pc on a year-on-year basis in December 2021, as compared to the same month of the preceding year. The increase in inflation in recent months is mainly driven by soaring prices of fuel, electricity, house rent, transport and non-perishable food items. According to the finance ministry, Pakistan’s inflation rate was driven by international commodity prices, exchange rate, seasonal factors and economic agents’ expectations concerning the future developments of these indicators.

Fitch Ratings, one of the three major global ratings agencies, has revised down its forecasts for the Pakistani rupee due to a variety of factors including an increased flow of US dollars into Afghanistan, projecting an average rate of Rs180 versus a previous forecast of Rs165 in 2022. “Our expectation for the currency to weaken further is based on Pakistan’s worsening terms of trade, tighter US monetary policy, alongside the flow of US dollars out of Pakistan and into Afghanistan,” it said. Analysts say the rupee has been hit by consistently high demand for dollars due to the country’s current account deficit while the Afghan situation is increasing pressure. Over the long term, tightening US monetary policy alongside higher structural inflation relative to the United States would weaken the rupee against the dollar, Fitch said. It, however, said that the undervaluation of the rupee on a real effective exchange rate basis would limit excessive weakness in the currency.

Experts also fear the dollar may cross Rs200 with the sudden imposition of a withholding tax on exchange companies, which are getting notices of hundreds of millions of rupees from the Federal Board of Revenue (FBR). Representatives of exchange companies told the media they were getting notices from the FBR on non-payment of the withholding tax that had been withdrawn in 2016. The companies say the added cost would be passed on to customers, which may push the dollar rate beyond Rs200.

Pakistan had managed to contain its current account deficit by placing curbs on imports, which squeezed the economy. The economy has started improving after the government relaxed its contractionary policy, but it has again put pressure on the current account and the rupee. Pakistan will have to improve its exports significantly to break the vicious cycle.