NationalVOLUME 17 ISSUE # 1

Rising threats to economy

Rising current account deficit and inflation are the biggest challenges for the policymakers of the country. The government believes seasonal factors are behind the hike in the current account deficit, which increased significantly in the last two months of the previous fiscal year. The government claims inflation has dropped in the country, while the common people believe prices have only decreased on paper.

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 in June since the budget was expiring. Besides, there were some new imports — for example, vaccines imported to fight the pandemic — the impact of which was not present last year. Food import payments have been high in the last fiscal year. 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,” SBP Governor Reza Baqir said, adding they believed a current account deficit that was 2-3pc of the GDP was sustainable.

He said that remittances had increased by a record 25pc and the SBP believed they would remain “resilient”. The central bank has kept the policy rate at 7pc for more than a year to support the economy during the pandemic. “The results of the consistent monetary policy, as well as measures taken by the SBP, are in front of the nation in the form of 3.94pc economic growth. Inflation, which was nearly 9.7pc in April, has reduced and the number for June is 8.9pc. Even now inflation is high. There is a need to reduce it further. There has also been a bit of reduction in headline inflation and core inflation,” the governor claimed.

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. “I want to tell you all that all three warning signs are not present during the current increase which is why the SBP has confidence that the moderate increase in our current account deficit will be sustainable,” the SBP governor argued.

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 are 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 government adopted a contractionary policy, which improved fiscal indicators. The indicators have started worsening as 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 during the PTI government. 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. All governments in the world are judged by their efforts to create jobs for people and bring down inflation. The present government is a huge failure on the two fronts.