FeaturedNationalVOLUME 17 ISSUE # 21

The new government’s dilemma

The last government of Prime Minister Imran Khan had made fiscal and monetary adjustments which improved economic indicators of the country but hurt the people badly. If the new government withdraws steps for monetary tightening and fiscal consolidation, the country will face dire economic problems and if it continues the policies, people would continue to suffer from high inflation. It is a dilemma of the government which has come to power after holding a Mehengai Mukao (End inflation) march.

A Pakistan Muslim League-Nawaz (PML-N) is always known for tax exemptions and relief to traders. It will be interesting to note how it provides relief to its biggest vote bank at a time when Pakistan urgently needs to increase its revenue. The last PML-N government had kept the dollar artificially low against the rupee. In fact, the last PPP government also resorted to the practice, which kept the prices of essentials under control, but cost the country dearly. It will be interesting to see if the PML-N coalition government continues the policy and whether the economy can withstand it? It is also to be seen whether Pakistan reneges on its commitments to international lenders?

Like the past government, the new government also faces serious economic challenges. Pakistan continues to face internal and external pressures which started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate which also reinforced domestic price pressures. According to the IMF, Pakistan’s economy is set to keep on recovering in the current fiscal year, with real GDP growth projected at 4pc. In its latest report, the IMF warned Pakistan that inflation in the country was “expected to pick up this year before gradually slowing down.” It also reminded Pakistan that “continued commitment to a market-determined exchange rate and a prudent macroeconomic policy mix will help reduce the current account deficit, and ease external pressures over the medium term.” It urged Pakistan to make extra efforts to revitalise its economy, noting that recent policy adjustments in Pakistan were “appropriate to address these challenges” and maintain economic stability. “Further ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy will help unlock sustainable and resilient growth,” it noted.

The Asian Development Bank (ADB) forecast Pakistan’s economic growth rate to slow down to 4pc this year from 5.6pc in FY21 owing to tighter fiscal and monetary policies and Russia-Ukraine war fallout. “Pakistan’s growth is forecast moderating to 4pc in 2022 on weaker domestic demand from monetary tightening and fiscal consolidation before picking up to 4.5 in 2023”, the ADB said in its latest report. It expects inflation to pick up in FY22, averaging 11pc, reflecting higher international energy prices, significant currency depreciation, and elevated global food prices from supply disruptions. Because Pakistan is a net importer of oil and natural gas, with both comprising almost 20pc of total imports, the country will continue experiencing strong inflationary pressure for the rest of the current fiscal year from the jump in global fuel prices related to the Russian invasion of Ukraine, it observed.

The domestic political uncertainty, elevated global commodity prices, mainly the crude oil price in the wake of the Russia-Ukraine war, a significant drop in the country’s foreign exchange reserves and US Federal Reserve hints for strong upward revision in its benchmark interest are some of the global and domestic developments which forced State Bank of Pakistan to increase the benchmark interest rate by a massive 250 basis points to a two-year high at 12.25pc. Besides, the large current account deficit and elevated inflation reading compelled the central bank to jack up the key policy rate. Externally, future markets suggest that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions, the central bank elaborated.

Undoubtedly, there are some positives but the economy still faces serious challenges. According to the Ministry of Commerce, Pakistan’s exports for March grew by 17.3pc to $2.773 billion as compared to $2.365 billion in March 2021. Exports during the past nine months of this financial year have reached $23.332 billion as compared to $18.688 billion over the corresponding period of the last fiscal year which is around 25pc increase. The export proceeds in March posted a growth of 17.3pc to $2.773 billion this year from $2.365 billion over the corresponding month of the last year. The average monthly export proceeds hover between $2.5 billion and $2.8 billion.

Pakistan’s current account deficit also nosedived to a sustainable level at an eight-month low of $545 million in February. The current account deficit (CAD) narrowed down to one-fifth against an all-time high at $2.53 billion in January 2022. Exports were close to all-time highs, rising 16% in February compared to January. Imports fell by 18pc to their lowest level in FY22, the State Bank of Pakistan (SBP) reported. Besides, receipt of strong workers’ remittances improved 2pc during February compared to the previous month of January, the central bank data suggested.

The Federal Board of Revenue (FBR) has surpassed its collection target by Rs247 billion from July to March of the current financial year. The FBR collected Rs4,382 billion from July 2021 to March 2022, which exceeded the target by Rs247 billion. It represents a growth of about 29.1pc over the collection of Rs3,394 billion during the same period last year. According to the Asian Development Outlook (ADO) 2022, Pakistan’s revenue collection is still lower when compared with peers and it needs a strong reform effort to achieve its tax-to-GDP potential of 22-25pc.

It is clear that the new government cannot delay the implementation of critical structural reforms which could lead to further fiscal and macroeconomic imbalances.