NationalVOLUME 17 ISSUE # 8

Political pressure threatens economic reforms

Pakistan eyes growth of 4-5pc in the current fiscal year after registering the first recession in seven decades of its history in the pandemic year that ended in June 2020. The country grew by 3.94pc in the last fiscal year, against all odds and national and international estimates. As the pandemic has subsided in the country and the world, Pakistan’s economy is expected to perform even better, though it still faces serious internal and external challenges, especially after the fall of Kabul to the Taliban.

Economic indicators prove Pakistan is moving in the right direction after the adoption of a contractionary policy by the government of Prime Minister Imran Khan for over two years. Pakistan’s exports are growing steadily, though imports are also increasing at a higher rate. Exports of the country recorded 17.5pc growth and reached $2.471 billion in October 2021, against $2.104 billion in the corresponding month of the previous year. “This is the highest-ever export in October in our history,” Adviser to Prime Minister on Commerce Abdul Razak Dawood said. However, the adviser noted that foreign shipments fell short of the target of $2.6 billion for the month. He pointed out that the country’s exports grew by 25pc to $9.468 billion during July-October 2021, compared to $7.576 billion in the same period last year. Pakistan had fixed a target to ship merchandise worth $9.6 billion abroad in the four-month period. Imports also jumped by 64pc to $24.99 billion in July-October 2021, compared to $15.19 billion in the corresponding months of 2020. Over 40pc of the increase was driven by investment in capital goods, raw material and intermediate goods, which indicated expansion and enhanced activity in the industrial sector. The remaining 60pc of imports comprised petroleum products, coal and gas (34pc), vaccines (11pc) and food (8pc).

The government plans to increase exports up to $40 billion during the current financial year as it focuses on the diversification of unconventional sectors. Razak Dawood hopes the country’s exports would reach $50 billion by following the policy of trade diversification in potential sectors and markets by the last fiscal year 2023 of the government. Export diversification, focus on non-traditional sectors and increasing exports to new markets, including Africa, are key points of the new trade policy.

The Federal Board of Revenue (FBR) has also surpassed the monthly tax collection target for October. Its collection exceeded the target by Rs31 billion as it collected Rs428 in October against the target of Rs397 billion. The FBR collected Rs1,840 billion in the July-Oct period, which is 37pc higher than last year. Income tax collection also grew by 32pc on a year-on-year basis. Meanwhile, inflows from overseas Pakistanis declined by 7.4pc in October as compared to a month earlier even though cumulative remittances reached a record $10.6 billion during the first four months of the current financial year. “At $2.5b in October 2021, remittances continue their strong streak, rising by 10pc from October 2020 and only moderating marginally compared to September 21,” the State Bank of Pakistan (SBP) said. Remittances in September amounted to $2.7b.

However, surging imports during the July-October period have widened the trade deficit, putting significant pressure on the rupee-dollar exchange rate which ultimately reflected in a higher current account deficit. However, Fitch Ratings says Pakistan’s recent policy adjustments and demonstrated access to external financing, as well as its commitment to a market-determined exchange rate, offset rising external risks from a widening current-account deficit. In its latest report, it said that ongoing reforms, if sustained, could create positive momentum for the sovereign’s ‘B-’ rating, which it affirmed in May 2021 with a Stable Outlook. However, it noted that 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. “The current-account deficit in the fiscal year to June 2022 is set to be wider than our previous forecast of 2.2pc. The State Bank of Pakistan (SBP) on November 19, 2021, raised its policy rate by a significant 150bp to 8.75pc, pointing to rising risks related to the balance of payments and inflation,” it observed.

The leading credit rating agency thinks external liquidity pressures should be manageable in the near term, despite the wider current-account deficit, given Pakistan’s adequate foreign-exchange reserves and success in accessing financing. Official reserve assets nearly doubled to $24.1 billion by end-September 2021 from $12.6 billion two years ago. However, liquid foreign-exchange reserves have dropped since mid-September, which we believe may partly reflect debt repayment. Pakistan’s near-term financing efforts have been supported by Saudi Arabia, which plans to place $3 billion on deposit with the SBP and provide an additional $1.2 billion oil-financing facility under a one-year support package. Its foreign reserves also received a $2.8 billion boost in August from the IMF’s one-off global allocation of Special Drawing Rights, the agency noted.

Funding from the sources followed Pakistan’s successful international debt issuance through a $2.5 billion bond in March 2021 and a follow-on $1 billion bond as part of its global medium-term note programme. Pakistan aims to tap debt markets more regularly through the scheme, which could reduce the costs of coming to market. The authorities also plan new sukuk issuance in 2021. Following a staff level agreement on the sixth review of the country’s Extended Fund Facility (EFF) reached on 21 November, the IMF is set to release a further $1 billion in funding, provided certain prior actions are met. “We believe these include amending the SBP Act to formalise the central bank’s institutional independence and removing some tax exemptions. The authorities’ sustained reform efforts and commitment to the IMF programme should support access to external financing, even with global financing conditions potentially becoming more challenging for emerging markets in 2022 as global monetary policy settings grow less accommodative.”

If the government retains its commitment to a market-driven exchange rate, Fitch Ratings believes this would be a useful shock absorber to help contain external risks in the longer term. An exchange rate that supports the price competitiveness of Pakistan’s exports could over time help to reduce the country’s reliance on debt financing to balance its external accounts, which remains a credit weakness. In addition, fiscal consolidation under the EFF could help reduce external imbalances by dampening imports, while also reducing the drag of weak public finances on Pakistan’s rating.

In its rating review in May, Fitch Ratings had noted that continued implementation of policies sufficient to facilitate a rebuilding of foreign-exchange reserves and easing external financing risks could lead to positive rating action. It also argued that positive rating momentum could emerge from improvements in the business environment or fiscal consolidation, if sustained over time. Continued adherence to the EFF reform agenda would increase the likelihood of achieving these outcomes. Nonetheless, political pressures could test the government’s commitment to reform, particularly if inflation accelerates from its already high levels, it warned.

It is a fact that prices are not decreasing; they are persistently on the rise. On the other hand, the opposition alliance has also announced a “decisive” movement against the government. It could threaten political stability and economic reforms.