FeaturedNationalVOLUME 17 ISSUE # 30

People’s compounding problems

The government has announced abolishing subsidies on electricity and fuel in the next month. It is feared petrol will sell at over Rs300/litre and a power unit would cost over Rs40. It will push up prices of all essentials and non-essentials. The inflation rate in the previous government ranged between 11 and 13pc and it hurt badly. The pain will be unbearable after inflation is feared to hit 30pc in the next few months.

As the country is also facing a serious power crisis and a hike in the key policy rate will adversely affect the industry and leave thousands of people jobless. The GDP growth is expected to remain much below the previous year’s level. The rupee is under huge stress against the dollar. It hit an all-time low at 202.83 against the US dollar on June 7. It still hovers around 200 despite positive signs of the revival of the IMF programme.

Recently, the State Bank of Pakistan (SBP) raised the key policy rate by 150 basis points (bps) to an 11-year high of 13.75pc. Cumulatively, the key policy rate has been increased by 675 basis points under the current cycle of upward revision since September 2021. The tightened monetary policy aims to slow down the economic growth to a sustainable level and control imported inflation in the country.

The foreign exchange reserves held by the central bank decreased by 5.10pc on a weekly basis in June, according to data released by the State Bank of Pakistan (SBP). On June 3, the foreign currency reserves held by the SBP were recorded at $9,226.2 million, down $497 million compared with $9,722.9 million on May 27. The central bank cited repayment of external debt as the reason for the decrease. Overall liquid foreign currency reserves held by the country, including net reserves held by banks other than the SBP, stood at $15,176.5 million. Net reserves held by banks amounted to $5,950.3 million. On August 27, 2021, the foreign exchange reserves held by the central bank had soared to an all-time high of $20.15 billion.

On the other hand, Moody’s Investors Service has downgraded Pakistan’s credit rating outlook to negative from stable on fears the global commodity prices will remain elevated, which will continue to keep the current account deficit widened and impact the foreign exchange reserves in the current and next fiscal years. Besides, domestic political uncertainty ahead of next general elections may also keep the economic decision-making process weak. The credit rating agency, however, affirmed the government of Pakistan’s current credit rating at ‘B3’ on strong expectations that the country would succeed in acquiring the required foreign financing from the International Monetary Fund (IMF) and other multilateral and bilateral lenders for FY22 and FY23. The decision to change the outlook to negative is driven by Pakistan’s heightened external vulnerability risk and uncertainty around the sovereign’s ability to secure additional external financing to meet its needs. Moody’s assesses that Pakistan’s external vulnerability risk has been amplified by rising inflation, which puts downward pressure on the current account, the currency and – already thin – foreign exchange reserves, especially in the context of heightened political and social risk.

“Pakistan’s weak institutions and governance strength adds uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF Extended Fund Facility programme and maintain a credible policy path that supports further financing.” Moody’s also expects Pakistan’s current account to remain under significant pressure on the back of elevated global commodity prices through 2022 and 2023. The current account deficit has widened to $13.8 billion since the start of the current fiscal year in July 2021 until April 2022 compared to a deficit of $543 million in the same period a year earlier. In the absence of an equivalent inflow in the financial account, the rapid widening of the current account deficit has led to a large drawdown of the foreign exchange reserves.

“According to data from the IMF, Pakistan’s foreign exchange reserves have declined to $9.7 billion at the end of April 2022, which is sufficient to cover less than two months of imports. This compares with the $18.9 billion of reserves at the end of July 2021.” As global commodity prices decline gradually in 2023 and as domestic demand moderates, the ratings agency expects the current account deficit to narrow to 3.5-4pc of GDP. Moody’s also projects Pakistan’s real GDP growth to slow to 4.2pc in fiscal 2023, moderately lower than the government’s projections. This compares with growth of 6pc in fiscal 2022.

According to the State Bank of Pakistan, external pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors. “The Russia-Ukraine conflict and COVID-19 pandemic have also caused a significant surge in the global commodity prices, including petroleum products. This, along with elevated aggregated demand for imported goods in the domestic economy and subsidies on local energy products, has caused fast depletion in the country’s foreign exchange,” the central bank noted in its latest report.

On the other hand, inflation hit an all-time high of 23.98pc in the first week of June. According to the Pakistan Bureau of Statistics (PBS), prices of at least 33 essentials increased in the week, while petroleum prices also went up by Rs60/litre.

It is feared that inflation will reach over 30pc in a few weeks from the ripple effect of the falling rupee, high electricity, gas and POL prices. It will provide ammunition to former Prime Minister Imran Khan, who is ready to hold another long march against the government.