FeaturedNationalVOLUME 17 ISSUE # 3

Losing hard-found gains?

Rising inflation and current account deficit have emerged as key risks to the macroeconomic outlook of the country. The government continues to rely on borrowing as it received $1.6 billion in gross foreign loans in July, 100pc higher than the same month of the previous year, to build up foreign exchange reserves and repay maturing debt.

The rupee has become the worst-performing currency in Asia after being the world’s best performer six months ago. Foreign direct investment is falling sharply. International institutions have downgraded the Pakistan Stock Exchange. Pakistan faces a far higher trade deficit at the end of the current fiscal year than the targeted deficit of $28.4 billion. Inflation is projected to increase in the coming weeks. It appears the country has reached the level it was left by the previous government three years ago.

The economic managers of the government are also feeling the heat of the situation after claiming to put the country on the path to prosperity and improving all economic indicators. According to a new report by the Ministry of Finance, inflation may rise over 9pc because of monetary expansion and a spike in international commodity prices and the current account deficit could remain over half a billion dollars in August. In its monthly economic outlook report, the ministry warned of the widening of the current account deficit, again.

According to analysts, the trade deficit at the end of the current fiscal year could be far greater than the targeted deficit of $28.4 billion. The country’s July-August trade deficit has widened by 120pc to $7.5 billion after imports witnessed a new historic peak, with exports growth not matching the pace despite huge depreciation of the local currency against the dollar. Pakistan’s exports have long remained around $2 billion per month and the trend does not clearly change despite about 40pc currency depreciation during the PTI government’s tenure in the past three years. The rising imports would not only increase external borrowing requirements but also dent the foreign exchange reserves.

However, the government expects the current account deficit to remain at manageable levels taking into account the monthly average of remittances flows of around $2.5 billion and other secondary and primary income flows. The finance ministry says that imports of goods and services will be around $6 billion in September, implying around $5.5 billion imports of goods. As a result, the current account would remain in deficit at moderate monthly levels of around $500 million.

The current account posted a deficit of $773 million (or 2.8pc of GDP) in July as against a surplus of $583 million last year. The central bank has predicted up to a $9.5 billion current account deficit in the fiscal year as against a $13 billion projection by the Ministry of Finance. The ministry said that the current account deficit had widened due to growing import volume of energy and non-energy commodities, along with a rising trend in global prices of oil, Covid-19 vaccines, food, and metals.

On one hand, global economic recovery, especially in Pakistan’s main trading partners, is a healthy sign for growth of exports and workers’ remittances. However, rise in international commodities prices are becoming a downside risk in terms of high imports value and building inflationary pressure for Pakistan. Cognizant of the risks, the government has already initiated building strategic reserves of essential commodities along with vigilant monitoring of imports, the ministry added.

Meanwhile, foreign direct investment fell sharply by 38.7pc during the first month of the new fiscal FY22 compared to July FY21, following the declining trend noted in the previous fiscal year. The State Bank of Pakistan’s latest data shows that the country received only $90 million as FDI during July against an inflow of $128.7m in the same month of the previous fiscal.

On the other hand, the government received $1.6 billion in gross foreign loans in July, 100pc higher than the same month of the previous year, according to the Ministry of Economic Affairs. Due to increasing reliance on foreign loans to manage foreign exchange reserves and repay loans, the cost of external debt servicing has gone up significantly. The State Bank of Pakistan said that during the first three years of its tenure, the Pakistan Tehreek-e-Insaf (PTI) government had added Rs14.9 trillion to public debt, which is 60pc more than the debt burden in June 2018. The growing dependence on debt has exposed the country to many internal and external risks.

To compound the problems, the rupee has hit a 13-month low of Rs166.98 against the US dollar in the inter-bank market due to a surge in demand for the greenback to pay for imports. The rupee has become the worst-performing currency in Asia compared to being the world’s best performer six months ago. The local currency has depreciated almost 10pc (or Rs14.71) in the past four months, becoming the “worst performer in Asia in a basket of 13 currencies compiled by Bloomberg,” it reported. The rupee hit a 22-month high of Rs152.27 in May 2021, but since then it has been sliding down.

In line with market expectations, Morgan Stanley Capital International (MSCI) downgraded the Pakistan Stock Exchange (PSX) among lesser advanced economies into the Frontier Markets (FM) index with effect from December 1, 2021. It had been classified in MSCI’s leading Emerging Markets (EM) index since May 2017 when the benchmark KSE-100 Index hit an all-time high of 53,000 points, but the country failed to sustain the level and the index never returned to the high level since then.

Meanwhile, inflation, the biggest tormentor of the people, continues unabated as the Sensitive Price Indicator (SPI)-based weekly inflation for the combined consumption group for the week ended on September 9 witnessed an increase of 1.37pc as compared to the previous week while it went 13.64pc up on a year-on-year (YoY) basis. According to data released by the Pakistan Bureau of Statistics (PBS), the combined index was at 155.26 on September 9 as compared to 153.16 on September 2, while the index was recorded at 136.62 a year ago on September 10, 2020. During the week, out of 51 items, prices of 24 (47.06pc) items increased, rates of 5 (9.80pc) items decreased, while prices of 22 (43.14pc) items remained unchanged. On a yearly basis, the SPI increased across all quantiles ranging between 13.06pc and 17.20pc.

Pakistan’s inflation rate is mainly driven by current and past fiscal and monetary policies, international commodity prices, US dollar exchange rate, seasonal factors and economic agents’ expectations concerning the future developments of the indicators. Last fiscal year, money supply witnessed expansion of Rs3.4 trillion, showing a growth of 16.2pc over the preceding year. The finance minister has accepted that an increase in international commodity prices could build pressure on domestic inflation as well as on the balance of payments. It means people will continue to suffer and cannot expect relief anytime soon.