FeaturedNationalVOLUME 17 ISSUE # 43

Widening cracks

Frequent power and gas tariff hikes and fuel prices have led to the worst inflation in the country. A falling rupee is adding fuel to the fire. Foreign reserves are also falling. It appears all is not well on internal and external fronts even after the revival of the IMF package and the government will have to take urgent measures to face the challenges.

Foreign exchange reserves are still inadequate to meet the country’s external needs. The foreign exchange reserves held by the central bank increased 14.3pc on a weekly basis, according to data released by the State Bank of Pakistan (SBP). “During the week ended September 2, the SBP received $1,166 million from the IMF under EFF (Extended Fund Facility) programme,” the SBP said in a statement. On September 2, the foreign currency reserves held by the SBP were recorded at $8,799.9 million, up $1,103 million compared with $7,697.1 million on August 26. Overall liquid foreign currency reserves held by the country, including net reserves held by banks other than the SBP, stood at $14,473.5 million. Net reserves held by banks amounted to $5,673.6 million. After accounting for external debt and other payments, the SBP’s reserves increased from $1,103 million to $8,799.9 million. In the week ended August 27, 2021, the foreign exchange reserves held by the central bank soared to an all-time high of $20.15 billion after Pakistan received general allocation of Special Drawing Rights (SDRs) worth $2,751.8 million from the IMF on August 24.

On the other hand, the rupee continues to lose its value against the US dollar even after the revival of the IMF package. The local currency closed at Rs229.82 per dollar on September 12, data shared by the State Bank of Pakistan (SBP) shows. According to the Exchange Companies Association of Pakistan, there are several factors behind the rupee’s decline, including an expected increase in the import bill in the aftermath of devastating floods. However, one of the primary reasons is that friendly countries, which had promised to provide financing once the International Monetary Fund’s (IMF) deposit was received, had not yet fulfilled their commitments. The smuggling of dollars to Afghanistan is also contributing to the problem. The rupee has been losing ground against the dollar since September 2. The rupee’s value has declined by 26.37pc over the last 52 weeks. It fell to a record low of 239.94 on July 28.

Another aspect to worry about is that Pakistan has been receiving the lowest foreign direct investment (FDI) in the region, excluding Afghanistan. Pakistan’s foreign direct investment (FDI) fell by 43pc to $59 million in July from $103.8 million a year ago, the central bank data shows. The FDI saw a 78pc decline on a month-on-month basis. It amounted to $271 million in June. The State Bank of Pakistan’s data showed that the financial sector attracted $27.7 million in FDI from global investors in the first month of this fiscal year, which was lower when compared to $36 million in the corresponding month of last year. Investment in the gas and exploration sector dropped to $2.7 million from $19 million. Direct investment in the communications sector also fell to $10.6 billion from $14.9 billion. However, investment in the power sector rose to $30.6 million in July from $26.5 million a year earlier. Investment flows from the UAE increased to $13 million from $3 million, and investment by Swiss firms rose to $12 million from $11 million. However, FDI from China fell to $5 million from $3 million.

Most worryingly, inflation has increased in the country at the highest level. However, weekly inflation dropped slightly and posted an increase of 42.70pc largely driven by essential kitchen items and high energy costs, according to data released by the Pakistan Bureau of Statistics (PBS). Weekly inflation measured by the Sensitive Price Indicator (SPI) posted a slight decline of 0.58pc on a week-on-week basis that ended on September 8. Before this, the highest ever year-on-year increase in the SPI was 45.5pc recorded for the week ending on September 1 and 44.58pc, recorded for the week ending on August 25, and 42.31pc in the week ending on August 18.

The latest data shows that the SPI dipped slightly on a week-on-week basis, mainly because of a major drop in food prices—tomatoes and onions, on account of imports from Afghanistan and Iran. The week ending July 28 saw the highest week-on-week increase in inflation, at 3.68pc. Soaring vegetable prices due to damage to standing crops and a massive hike in electricity rates have also contributed to higher prices. The damage to standing crops will push up the prices of vegetables in the coming weeks. The International Monetary Fund said that the average Consumer Price Index (CPI) inflation was expected to surge to 20pc in the current financial year, while core inflation would also remain elevated due to higher energy prices and the rupee’s decline.

High international prices of petroleum products and palm oil have contributed heavily to food inflation in Pakistan. According to international estimates, their prices are not expected to come down in the near future. People cannot wait so long for relief. Recent floods have compounded their miseries. The government will have to provide subsidies on food and fuel to lower segments of society, which find it difficult to make both ends meet.