FeaturedNationalVOLUME 18 ISSUE # 12

High currency devaluation, taxes and electricity prices

Pakistan’s currency is fast losing its value against the US dollar after the removal of price caps imposed by the government. Under conditions set by the International Monetary Fund, the government is expected to raise fuel, electricity and gas prices and introduce new taxes. It means life will become tougher for the common people in the coming weeks even though they are already facing the hardest times.

Another serious issue for Pakistan and its people is that the economy is expected to contract further because of national and international reasons, which will pile up more misery on the common people. The Finance Ministry of Pakistan sees three major challenges confronting the economy, including stagflation, low foreign currency reserves and immense pressures on fiscal fronts. Its monthly report said exports of goods decreased by 21.6pc on a YoY basis in December 2022, while exports of services declined by 3.2pc. As a result, exports of goods and services declined by 18.1pc in December. On the other hand, import of goods decreased by 34.4pc on a YoY basis and 2.7pc on MoM basis in Dec 2022. Similarly, imports of services declined by 44.5pc on a YoY basis. As the imports fell more than the decline in exports, the trade balance of goods and services improved by 52.3pc.

The current account balance slightly deteriorated in December. This was mainly due to an increase in primary income payments and a decrease in remittances. “Geopolitical tension, tightening financial conditions and rising inflation have all had a considerable negative influence on growth expectations, creating severe challenges for the global economic environment. Pakistan is no exception,” it observed.

The government has adopted tight fiscal and monetary policies to combat the economic problems brought on by both internal and external forces. Currently, it is facing a difficult task of supporting vulnerable segments of society and meeting other public spending needs, particularly rising interest servicing. However, due to prudent spending management and effective domestic resource mobilisation, the fiscal deficit was not only confined to the same level of 1.4pc of GDP as last year, but primary balance surplus was also maintained during the first five months. Nonetheless, rising interest payments due to an increase in domestic and foreign interest rates as well as flood-related spending can put extensive pressure on overall spending, the ministry observed. In the absence of adequate fiscal space to mitigate the impact of various economic shocks, the government’s option would be to reallocate expenditures towards critical areas, while improving spending efficiency. Raising revenue by broadening the tax base, making the tax system more progressive and reducing tax avoidance and evasion is the other option, the report suggested.

The International Monetary Fund (IMF) forecast that Pakistan’s economy would grow by 2.0pc in FY2023, 1.5pc lower than what it projected in the October 2022 World Economic Outlook (WEO). According to its update on its World Economic Outlook report, global growth is projected to fall from an estimated 3.4pc in 2022 to 2.9pc in 2023, then rise to 3.1pc in 2024. “The rise in central bank rates to fight inflation and the Russia-Ukraine conflict continue to weigh on economic activity. The rapid spread of COVID-19 in China dampened growth in 2022, but its recent reopening has paved the way for a faster-than-expected recovery,” it noted.

Earlier, the World Bank forecast Pakistan’s economic growth to slow further to 2pc during the current year — down by two percentage points from its June 2022 estimate — because of the devastating floods and slowdown in global growth rate. The World Bank’s forecast also points to a “sharp, long-lasting slowdown” with global growth pegged at 1.7pc this year, compared to 3pc it predicted in June, said the bank’s latest Global Economic Prospects report.

It said that global growth was slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine. It said Pakistan’s economic output was not only declining itself but also bringing down the regional growth rate. It forecast Pakistan’s GDP growth rate to improve to 3.2pc in 2024, but that too would be lower than the earlier estimate of 4.2pc. “Policy uncertainty further complicates the economic outlook” of Pakistan, in addition to flood damages and the resultant increase in poverty, the bank said, explaining that an already precarious economic situation in Pakistan, with low foreign exchange reserves and large fiscal and current account deficits, was exacerbated in August last year by severe flooding, which cost many lives.

“Recovery and reconstruction needs are expected to be 1.6 times the FY2022-23 national development budget,” it said, adding that the flooding is likely to seriously damage agricultural production — which accounts for 23pc of GDP and 37pc of employment — disrupting the current and upcoming planting seasons and pushing 5.8 million at 9m people into poverty. Pakistan, with low foreign exchange reserves and rising sovereign risk, saw its currency depreciate by 14pc between June and December and its country risk premium rise by 15 percentage points over the same period, it noted.

Pakistan faces challenging economic conditions, including the repercussions of the recent flooding and continued policy and political uncertainty. As the country implements policy measures to stabilise macroeconomic conditions, inflationary pressures dissipate, and rebuilding begins following the floods, and growth is expected to pick up to 3.2pc in FY2023-24 — still below previous projections. Food prices have risen rapidly in South Asia, especially in Pakistan and Sri Lanka, increasing the incidence of food insecurity in the region.

Export bans on food, also increasingly prevalent, could have unintended consequences and exacerbate increases in global food prices. Afghanistan, Bangladesh, India, and Pakistan implemented export restrictions on food in 2022, including rice, wheat and sugar. In some economies, the World Bank report noted, the deterioration in economic conditions has led to a substantial rise in poverty (Afghanistan, Pakistan, Sri Lanka). Many households are consuming less nutritious food, and rolling electricity blackouts have become common as fuel has been rationed.

The combination of limited foreign exchange buffers and widening external current account deficits encouraged several countries (including Bangladesh and Pakistan) to approach the International Monetary Fund to help bolster foreign exchange reserves and mitigate external financing pressures. In parallel, governments have tightened fiscal policies and, in some cases, imposed import controls and food export bans.

Fitch Solutions has projected Pakistan’s economic growth to contract by 0.3pc in the current fiscal year 2023 after the government allowed the local currency to devalue. The global research house believes that the rupee will continue to devalue, particularly with Pakistan’s balance of payments position likely to remain weak for several more months. “That being said, there remains a considerable amount of uncertainty at this juncture. For example, it is difficult to gauge the extent to which the latest devaluation has caused investor sentiment to further sour,” the report added.

As the balance of payment will be the biggest issue on the international front, high prices would badly affect the common people in the country.