FeaturedNationalVOLUME 17 ISSUE # 46

Rising uncertainties about exports, jobs

Textile factories are shutting down after the cotton crop was damaged by recent floods. The situation will not only affect exports but also leave a large number of people jobless, at a time when the inflation rate has reached historic peaks.

The devastating floods have also damaged other crops and vegetables, especially in Sindh. Pakistan is already importing onions and tomatoes from Iran and Afghanistan and will have to import cotton to run its textile mills, which will put more pressure on its meagre foreign exchange reserves. Foreign exchange reserves held by the State Bank of Pakistan (SBP) fell by $341 million to an alarming level of $8 billion as of September 23, according to official data. Total liquid foreign reserves held by the country stood at $13.76 billion, while net foreign reserves held by commercial banks amounted to $5.76 billion, the SBP said. The falling reserves and exports mean Pakistan’s balance-of-payment crisis will worsen in the coming weeks. It will also weaken the rupee, which would add to the inflation problem.

The closure of textile units will have serious consequences for the country as the sector employs over 10 million people, accounts for 5.4pc of Pakistan’s GDP and more than half to all export earnings. Experts fear international customers will cancel orders and exports could fall by at least 30pc for the current year.

Recent domestic and international factors have compounded Pakistan’s problems. In its latest report, the Ministry of Finance warned that Pakistan’s economic outlook had become uncertain and growth would likely remain below the target during the ongoing fiscal year. However, macroeconomic imbalances may ease with the expected slowdown in economic growth.

On the domestic front, the ministry said, the rise in international oil and food prices witnessed since March 2022 had significantly impacted inflation in Pakistan. “Even if international commodity prices mean-revert in the near future, domestic inflation may still suffer from delayed adjustments and second round effects,” it warned. Also, the depreciation of the rupee continues to exert upward pressure on domestic prices. At the same time, recent exceptional floods have destroyed human, physical, and livestock capital and deprived many families of their assets and incomes. These events will certainly affect the creation of gross value added and hence economic growth, which was already under pressure due to unstable economic conditions in the rest of the world and due to the necessary fiscal consolidation, high rates of interest, and inflation.

On the global front, major economies including the US, China, and the EU are slowing, which is affecting other countries, leading to an expected slowdown in global growth. Therefore, Pakistan’s external environment faces rising challenges. “However, their effects on inflation are being alleviated by prompt government measures to counter forms of price speculation and to provide sufficient supplies by allowing trade from neighboring countries,” it observed.

The ministry expected a halt to the recent drastic accelerations of the YoY inflation rate. However, prices still remain abnormally elevated on the back of high rates of fuel and electricity. Weekly inflation measured by the Sensitive Price Indicator (SPI) for the week ending on September 29 increased to 30.62pc year-on-year, because of a hike in the prices of essential food items, including tomatoes and onions, and fuel. Inflation had reached a record high of 45.5pc for the week that ended on September 1. Data released by the Pakistan Bureau of Statistics showed that inflation had increased by 0.94pc week-on-week. During the week, the prices of 20 items increased, those of 10 items decreased while 21 items remained unchanged.

International commodity prices are decreasing, however, they are not expected to reach the levels of pre-pandemic years. “Central banks around the world have been raising interest rates in 2022, a momentum that is likely to continue well into next year. Yet the currently expected trajectory of interest-rate increases, and other policy actions may not be sufficient to bring global inflation down to levels seen before the pandemic,” the finance ministry observed.

In its earlier report, the ministry had warned that the economic outlook was surrounded by global and domestic uncertainties, including lower growth, especially in the wake of floods affecting crops as well as elevated inflation. It also warned that the recessionary tendencies may hurt Pakistan’s export markets in the coming months. “The economic outlook is surrounded by global and domestic uncertainties. Geopolitical tensions remain unabated, worldwide inflation remains high, interest rates show tendencies to rise, and the US dollar strengthens. Pakistan’s external environment is facing increasing challenges,” it said.

On the other hand, Pakistan’s growth is also expected to slow down, as a result of floods and measures taken by the government. According to the Asian Development Bank, Pakistan’s economy will slow down to 3.5pc, from 4.5pc projected in April. It also linked the country’s medium-term prospects to the restoration of political stability and uninterrupted implementation of the IMF programme to rebuild economic stability and fiscal and external buffers. It noted Pakistan’s rate of inflation going up to 18pc for the current fiscal year against its previous forecast of 8.5pc made in April but attributed it chiefly to the lagged impact of unsustainable energy and fuel subsidies of the previous government. Pakistan’s medium-term prospects hinge critically on the restoration of political stability and the continued implementation and deepening of reforms under the revived IMF EFF programme to stabilise the economy and rebuild fiscal and external buffers, the ADB said. It also linked Pakistan’s economic outlook to the continued availability of adequate external financing under challenging domestic and global economic and political conditions.

Fears for the implementation of the IMF programme have already started to grow weeks after the release of its tranche, when the government lowered fuel prices. Former finance minister Miftah Ismail termed his own government’s decision of not increasing the petroleum development levy this month without IMF approval “reckless” but clarified that what the PTI had done with the economy was “unforgivable.” It is clear that the coalition government is attempting to balance its economic and political ambitions as former Prime Minister Imran Khan has warned of launching his protest movement to oust it in days. In the situation, economic stability will remain a pipedream.