FeaturedNationalVOLUME 17 ISSUE # 26

Mounting threats to economy

Rising current account deficit and inflation are the biggest challenges for the policymakers of the country. Rising commodity prices are an international issue and Pakistan will have to live with it. Inflation in the world and Pakistan is expected to decrease after the end of the Russia-Ukraine war. However, it will take months and years and the level of inflation will not be too low.

Experts believe seasonal factors are behind the hike in the current account deficit, which is increasing rapidly. Besides the current account deficit and inflation, increasing poverty and unemployment are also serious issues. According to the State Bank of Pakistan, the country made a lot of import-related payments last year. Besides, there were some new imports — for example, vaccines imported to fight the pandemic. Food import payments have been high. The government imported flour and wheat to reduce the prices of the products in the country. “For a country like Pakistan, which is considered to be an emerging market, a moderate amount of current account deficit is appropriate, especially if the country wants to keep the economic growth rate between three and four per cent,” according the State Bank of Pakistan. It believes a current account deficit that was 2-3pc of the GDP is sustainable.

Undoubtedly, remittances have increased remarkably over the past few years and the SBP believed they would remain “resilient” in the coming months and years. The central bank kept the policy rate at 7pc for more than a year to support the economy during the pandemic. According to the SBP, Pakistan’s current account deficit is fully funded which means it has enough sources to meet its growing needs. There have been three warning signs in the past whenever the country’s current account deficit skyrocketed — when the CAD was increasing very fast, when the exchange rate remained unchanged and the SBP’s reserves were falling. The three signs do not exist together, experts say.

However, international financial institutions see weak public finances, external finance vulnerabilities, low governance indicators, economic uncertainties from the pandemic and political challenges as big issues for Pakistan. According to Fitch Ratings, a decline in external vulnerabilities has been facilitated by adherence to a market-determined exchange-rate regime, which has served as a shock absorber during the pandemic. Progress towards institutionalising this framework, if sustained, should limit medium-term risks by keeping current account deficits contained and reducing foreign-exchange (FX) reserve pressures. External inflows have supported an appreciation of the Pakistan rupee against the US dollar and a further rebuilding of FX reserves. “We forecast a widening of the current account deficit to 1.9pc of GDP in FY22 as the recovery in domestic demand and higher oil prices push imports higher,” the rating agency said in its report on Pakistan.

The agency expects inflation to moderate to an average of 8.3pc over FY22, from an average of 9.0pc in FY21, as the temporary rise in food prices subsides, and the rise in oil prices moderates. “Risks remain that inflationary pressures could prove more persistent, particularly given a negative real policy rate, which could prompt a higher degree of tightening by the SBP,” it added. External debt repayments will remain high, at about $8 billion-10 billion per annum over the next few years. Public finances remain a key weakness for the sovereign. “We project the general government fiscal deficit will narrow slightly to 7.5pc of GDP in FY21, from 8.1pc in FY20, as revenue growth has been resilient due to tax administration improvements and the growth rebound. We forecast a further narrowing to 6.6pc of GDP on improving revenue and declining expenditure. The government interest burden as a share of revenue is high, at a Fitch-estimated 38.7pc in FY21, and the narrow revenue base remains a challenge for fiscal sustainability,” the rating agency noted.

Experts say budgetary estimates were highly fragile and the budget deficit may exceed 8 to 8.5pc GDP, equivalent to Rs4.5 trillion. Over 8.5 million people are unemployed in Pakistan, the highest number in the country’s history. The population below the poverty line stands at 38pc. According to some experts, the government also fudges figures on inflation, as actual prices are much higher than rates calculated by the Pakistan Bureau of Statistics (PBS). The government claims prices are coming down, while the ground reality is different from it. The past government had adopted a contractionary policy, which improved fiscal indicators. The indicators have started worsening after it relaxed the policy and imports increased. As the indicators improved or deteriorated, they could not provide relief to the common man. Prices of food have skyrocketed in recent months. Wheat flour, cooking oil and sugar have gone out of the reach of people. They cannot be pacified with improving fiscal indicators or fudged data of the Pakistan Bureau of Statistics. They need real relief from high prices.