FeaturedNationalVOLUME 17 ISSUE # 8

Historic highs and lows

International institutions have warned that inflation in Pakistan is the highest in the region and the situation may not improve in the years to come. It is a pity that the Pakistan Tehreek-i-Insaf, which boasted of a special economic team to improve the lot of the country, has overburdened it with massive foreign loans after coming to power. Prices of essentials have risen to a record high, the rupee has plunged to a record low against the dollar, while the current account deficit is rising to the dangerous levels seen in the last government of the Pakistan Muslim League-Nawaz.

In its latest report, Fitch Ratings, one the top three rating agencies, noted that inflation was already at high levels in Pakistan and it could increase further. “Increases in global energy prices and a strong domestic recovery from the initial Covid-19 pandemic shock have put additional strains on Pakistan’s external position. Political pressures could test the government’s commitment to reform, particularly if inflation accelerates from its already high levels,” it warned.

The annual inflation rate in Pakistan edged up to 9.2pc in October of 2021, from 9pc in the previous month. It was the fastest inflation rate since last June. The Asian Development Bank (ADB) projected that inflation in Pakistan would remain the highest in the region at 7.5pc. In its Asian Development Outlook Update (ADOU), it said inflation was projected to slow to 7.5pc in fiscal year 2021-22, unchanged from the forecast in 2021. However, it is the highest rate of inflation in the South Asian region, followed by 6.2pc in Bhutan, 5.8pc in Bangladesh, 5.2pc in Nepal and 4.8pc in India.

The International Monetary Fund (IMF) has also forecast an inadequate growth rate of 4pc for Pakistan coupled with elevated rates of inflation and unemployment during the current fiscal year. Its World Economic Outlook (WEO) projected the average rate of inflation at 8.5pc, current account deficit at 3.1pc of GDP and unemployment rate at 4.8pc during the current fiscal year. It said the rate of inflation would slide to 8.5pc this year against 8.9pc last fiscal year but would rise again to 9.2pc by the end of next year. It expected the Consumer Price Index to slowly come down to 6.5pc by FY2026.

Earlier, the World Bank projected inflation to edge up in FY22 with expected domestic energy tariff hikes and higher oil and commodity prices before moderating in FY23. “Poverty is expected to continue declining, reaching 4pc by FY23. The current account deficit is projected to widen to 2.5pc of GDP in FY23 as imports expand with higher economic growth and oil prices. In Pakistan, growth is expected to ease a little to 3.4pc in fiscal year 2021-22, as fiscal and monetary measures are expected to unwind,” the World Bank said in its report on South Asia.

On the other hand, the rupee has lost significantly against the US dollar in recent weeks. On November 26, a Rs1.81 decline in the inter-bank market during trading due to current account deficit pressure dragged the Pakistani rupee to a record low against the US dollar, with the exchange rate sliding to Rs175.73. Cumulatively, the local currency lost around Rs5.76 in seven days.

Pakistan’s total debt and liabilities have crossed Rs50.5 trillion, an addition of Rs20.7 trillion under the current government alone, revealed official figures. The State Bank of Pakistan (SBP) said that the country’s total debt and liabilities had jumped to a record Rs50.5 trillion at the end of September 2021, an addition of Rs20.7 trillion in the past 39 months. There was an increase of nearly 70pc in the total debt of the country. In June 2018, every Pakistani owed Rs144,000, which increased to Rs235,000 by September 2021, an additional burden of Rs91,000 or 63pc during the PTI’s tenure. However, the national debt has also increased after the government stopped interfering with the market-driven exchange rate. The previous PML-N and PPP governments spent $2-3b every year to support the rupee against the dollar.

In another worrying sign, the current account deficit has widened by $1.6 billion in October. The State Bank of Pakistan (SBP) sad the deficit was higher than September while it continued to increase its size in terms of GDP from 4.1pc to 4.7pc. The deficit has already gone much beyond the target which was in the range of 2-3pc of GDP for the entire current financial year. The increasing deficit has badly impacted the foreign exchange reserves and exchange rate which resulted in the depreciation of the rupee by 13.4pc during the current financial year. The foreign exchange reserves of the SBP have declined  by over $2.2b to $16.9b since October. In terms of dollars, the current account deficit increased by $1.663b in October, while the deficit for the first four months (July-October) of the current financial year rose to $5.084b. The reason behind the rising deficit is the growing size of imports. According to the SBP data, the imports in July-October went up by 66.3pc to $23.484b against $14.118b recorded in the same period of FY21.

The rising current account deficit was the main reason for the PTI government to seek an International Monetary Fund (IMF) bailout package. The government claims to have reformed the economy and put the country on the path to prosperity. It claims it has reformed the economy to an extent that the country would never need an IMF bailout package again. However, the worsening economic indicators will compel the next government to seek another IMF bailout package again.