FeaturedNationalVOLUME 18 ISSUE # 07

Serious challenges ahead

The country faces serious challenges in 2023. Its foreign reserves have fallen to a critically low level, while tax collection and remittances are also constantly declining. The rupee continues to shed its value against the US dollar, which is also contributing to rising prices in the country.

Pakistan will have to make long-term planning to revive the economy which is facing serious challenges on national and international fronts. Every government took only cosmetic measures to improve the economy, which left the country at a stage now that its only hope is a $1.9 billion tranche from the International Monetary Fund, which will lead to multi-billion dollar international funds.

According to the finance ministry, economic growth will remain below the budgeted target of 5pc due to devastation created by floods. In its monthly economic update and outlook, the ministry feared CPI inflation would remain in the range of 21-23pc, whereas standing water due to recent floods, may create further problems in achieving the assigned wheat sowing target. “For FY2023, economic growth is likely to remain below the budgeted target due to devastation created by floods. This combination of low growth, high inflation and low levels of official reserves is particularly challenging for policy makers. In the short run, demand management policies by the State Bank of Pakistan and government are designed to fight inflation and protect official reserves and protect inclusive growth,” it observed.

The government is providing relief through the Kisaan package and BISP. Although the government is committed to achieve fiscal consolidation by reinforcing fiscal discipline, additional spending due to flood-related activities may put significant pressure on total expenditure. As in many other countries, Pakistan’s economic activity remains currently below potential, implying a negative output gap. During the first five months of FY2023, Pakistan’s economy showed signs of resilience to domestic and global challenges. Despite facing inflationary pressures, trade and current account deficits are continuously showing improvement, which is a sigh of relief for financing challenges. On the fiscal front, fiscal consolidation is the topmost priority to achieve targeted fiscal deficit despite the government is facing the unprecedented challenge of providing relief to people in flood-hit areas. But in the long run, the government aims to stimulate the supply side to elevate the long-run potential growth rate of the economy. Increasing the long run growth trends of output, per capita real incomes and employment can only be achieved by stimulating investments in new production capacities and improving overall productivity. The report states that the wheat crop for 2022-23 has been sown on an area of 20.77 million acres. The input situation is expected to remain favourable due to incentives announced in the Kissan package.

Weekly inflation, measured by the Sensitive Price Index (SPI), increased by 29.3pc for the combined income group on a year-on-year basis ending on December 29 due to a massive surge in prices of both food and non-food items, according to the Pakistan Bureau of Statistics (PBS). Prices of food, especially wheat flour and vegetables, are steadily increasing over the past few weeks despite a decline in energy prices on a week-on-week basis.

The State Bank of Pakistan’s foreign exchange reserves have declined to $5.8 billion. The reserves are at their eight years’ low level, raising concern about the country’s ability to repay its foreign debt and meet import requirements. The central bank’s foreign exchange reserves have been persistently falling since the beginning of the current fiscal year.

Another serious issue is the rupee’s continuous decline against the US dollar. Remittances sent by overseas Pakistanis declined by 14pc in November this year. The inflows fell by 9.6pc during the first five months of the current fiscal year (FY23). The latest data released by the State Bank shows that the remittances declined to $2.1 billion in November from $2.5bn during the same month last year. The inflows declined by 5pc compared to $2.215bn in October this year. During July-Nov FY23, the remittances fell by $1.279bn (9.6pc) to $12bn from $13.286bn during the same period last fiscal year.

On the other hand, the government is facing a record shortfall of around Rs220 billion in tax collection during the first half of the fiscal year due to contractionary economic policies, exemptions to traders and revenue measures. Against the July-December target of Rs3.65 trillion, the Federal Board of Revenue collected Rs3.4 trillion so far, falling short of the goal by a record margin ever.

In a positive development, Pakistan reported a 19-month-low current account deficit at $276 million for November 2022, owing to a significant reduction in imports through administrative controls, but at the cost of economic growth. According to the State Bank of Pakistan, the current account deficit was 86pc lower at $276 million in November, compared to $1.92 billion in the same month of last year. It was 59pc lower when compared with the deficit of $569 million in October 2022. “Cumulatively, in the first five months (July-November) of the current fiscal year 2023, the current account deficit contracted by more than half to $3.1 billion against $7.2 billion in Jul-Nov 2021, with imports falling by $4.8 billion (-16%) and exports broadly unchanged,” the central bank said on its official Twitter handle.

It is clear that Pakistan is facing serious issues, which have been complicated by persistent inaction and recent floods. Pakistan has also suffered because of lack of continuation of policies and political stability. It seriously needs to review its policies.