FeaturedNationalVOLUME 17 ISSUE # 22

Is the economy as bad as portrayed?

Many analysts and the new government have raised the alarm that the outgoing government of Prime Minister Imran Khan had damaged the national economy badly. It is a common practice by every new government that it starts blaming the outgoing government for the “economic mess.” The PTI government had also claimed to have inherited a worst economy when it came to power in 2018.

Though the PTI government may not have performed brilliantly, yet its performance was not as bad as is being portrayed now. All international financial institutions have praised Pakistan’s efforts to make structural adjustments to its economy. In their latest reports, two major rating agencies and the World Bank only highlighted risks to the economy arising from the political crisis in Pakistan. Fitch Ratings said, “The previous government’s implementation of reforms in line with an IMF programme helped to underpin its access to global debt markets, in our view. This was highlighted by Pakistan’s issuance of a $1 billion sukuk in January 2022. Since then, the country’s access to private creditor finance has been challenged by external factors, such as rising US interest rates and heightened investor risk aversion around the Ukraine conflict. We believe setbacks to reform or the IMF programme would make access even more difficult.”

Commenting on the recent government change in Pakistan, it said it had raised near-term policy uncertainty even as the country faces external and fiscal challenges from rising commodity prices and an increase in global risk aversion. “The authorities’ policy agenda remains central to Pakistan’s ability to refinance its external debt over the medium term, as well as our assessment of the rating, which we affirmed at ‘B-’/Stable in February 2022,” it noted and observed that the outgoing government had lost public support and the backing of coalition allies against a backdrop of rising inflation. “The recent oil price shock will push up the current-account deficit, adding to already high gross external financing needs from an elevated debt-repayment schedule. We now forecast a current-account deficit of around 5% of GDP (around $18.5 billion) for the fiscal year ending June 2022 (FY22), up from 4pc in our February review. We expect this to moderate to around 4pc in FY23, as oil prices ease,” it observed.

Explaining Pakistan’s financial needs, it said the country faces $20 billion in external debt repayments in FY23, though this includes $7 billion in Chinese and Saudi deposits that it expects to be rolled over. “Higher trade deficits and capital outflows have driven a sharp depreciation of the Pakistani rupee against the US dollar. This, along with debt repayments, has put pressure on liquid foreign-exchange reserves with the State Bank of Pakistan (SBP), which fell by USD5.1 billion between end-February and 1 April 2022, to $11.3 billion. We believe the decline also partly reflects repayment of a $2.4 billion loan from China that is slated to be renewed,” it noted.

It warned that the change in government may complicate timely completion of the remaining three reviews of the IMF programme. Fitch also believes Pakistan has the ability to manage its external liquidity position in the near term if policy uncertainty is resolved relatively quickly and commodity prices do not rise substantially above forecasts for 2022-2023. “We expect its access to bilateral financing to remain robust, particularly from China. The two countries’ strong bilateral relationship is unlikely to be significantly weakened by Pakistan’s change in leadership,” it noted.

“The change in government will test how institutionalised recent reforms, such as the independence of the SBP and the more market-determined exchange rate, are. We would view slippage on reform momentum as credit negative. In the longer term, if the authorities are unable to pursue fiscal consolidation, we expect Pakistan’s access to market financing to remain constrained.”

Moody’s Investors Service also highlighted Pakistan’s “significant uncertainty over policy continuity” and falling foreign exchange reserves. However, the New York-based credit rating agency forecast a stable outlook for Pakistani banks and estimated the country’s gross domestic product (GDP) growth rate to remain between three and four per cent. It said, “The political upheaval reflects the volatility that besets Pakistan’s political environment and raises significant uncertainty over policy continuity, at a time when Pakistan is encumbered with surging inflation, widening current account deficits and declining foreign-exchange reserves”. It said it was unclear how the new government would approach the International Monetary Fund’s (IMF) programme during this interim period before the next election is called, prolonging the uncertainty around whether Pakistan would be able to secure financing from the IMF to bolster its foreign-exchange reserves, which have fallen to a level sufficient to cover only about two months of imports.

In its latest report, the World Bank noted that Pakistan had earlier followed its agreement with the IMF to remove tax exemptions and increase the tax on fuels. However, rising energy prices domestically and challenges from political opposition forced the government to offer electricity and fuel price relief in February. “While these measures can help reduce fluctuations in domestic prices, they also constitute a direct burden or hidden liability on the government’s budget, which could increase fiscal vulnerabilities going forward”.

In January, Pakistan’s GDP growth was put at 5.2pc which has since been changed. “This comes amid monetary tightening measures that began in September 2021, high base effects from the previous year, and continued high inflation eroding real private consumption growth,” the report said.

It is clear that Pakistan is not facing a serious crisis, like Sri Lanka, as some experts say. However, the new government will have to continue policies to stabilise the economy.