FeaturedNationalVOLUME 17 ISSUE # 6

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. Pakistan’s current account deficit is increasing and threatens to reach the levels seen in 2018. Foreign reserves are also falling. It appears all is not well on internal and external fronts and the government will have to take urgent measures to face challenges.

Pakistan’s current account deficit swelled to 4.1pc of GDP in the first quarter of the current fiscal year, exceeding the 2-3pc range projected by the government a few months ago. However, the deficit narrowed by 24pc to $1.113 billion in September, from $1.473b in August. The country had posted a current account deficit of $3.4b (4.1pc of GDP) in the July-September period against a surplus (1.2pc) in the same quarter last fiscal year, according to the State Bank of Pakistan. The latest data shows the trade deficit in goods doubled to $10.232b in the first quarter of the current fiscal year against $5.283b in the same period last year. The balance on trade in services recorded a deficit of $717m against a deficit of $533m in the first quarter of last year. According to the finance ministry, the surge in the import bill was because of few one-off imports, rising global commodities and energy prices. It said the country had spent $1b on vaccines in the first quarter which included $400 million in September alone. “Therefore, adjusting with vaccine imports, the current account deficit for the quarter has reduced to $2.4b,” it added.

Pakistan’s foreign exchange reserves dropped to $24.327 billion in the week ended October 15 from $25.969 billion a week ago due to foreign debt repayment. The SBP reserves decreased by $1.646 billion to $17.492 billion mainly due to external debt repayment that included repayment of $1 billion against Pakistan International Sukuk, the SBP said in a statement. The reserves of commercial banks slightly rose to $6.835 billion from $6.831 billion.

Though a multi-billion-dollar financial package announced by Saudi Arabia helped check the decline of Pakistan’s rupee against the US dollar, yet the local unit has been the worst performer in Asia in recent months against being the world’s best currency about six months ago. The currency recovered a substantial 1.44pc in the inter-bank market on the back of the $4.2b Saudi package. The previous day, the Pakistani currency had dropped to its lowest level against the US dollar, closing over the 175 level for the first time in the interbank market. The local currency has been on a losing streak since October 18, weakening every day against the US dollar.

Another aspect to worry about is that Pakistan has been receiving the lowest foreign direct investment (FDI) in the region, excluding Afghanistan. The outflow of profits and dividends from the country declined by over 17pc during the first quarter, reflecting low investment made by foreign companies. Data released by the State Bank of Pakistan shows that foreign investment could not yield the profits of the previous year’s level. The total outflow of profits and dividends during July-Sept FY22 was $477.7 million compared to $576.8m in the same quarter of last year, showing a decline of 17.2pc, or $99.1m. FDI from China declined by 50pc in the first quarter compared to the same period of the last financial year. FDI from the US exceeded that of China as it jumped to $100.9m compared to $19.7m in the same period last year.

Most worryingly, inflation has increased in the country despite being discussed in every cabinet meeting and the government’s claim to check it. Inflation measured through the Sensitive Price Index (SPI) rose 1.38pc for the week ended on Oct 22, driven by a sharp rise in the prices of essential food items, the Pakistan Bureau of Statistics (PBS) said. This is the third consecutive week that witnessed an upward increase in prices. In September, the highest jump of 1.3pc in weekly inflation was recorded. For the lowest income group earning below Rs17,732 per month, the SPI increased by 0.96pc and for the group earning above Rs44,175, it rose by 1.58pc. It was mainly due to an increase in prices of essential items including tomatoes 41.63pc, diesel 10.06pc, petrol 8.19pc, LPG 7.11pc, mustard oil 2.23pc, vegetable ghee 1kg 1.91pc, bread 1.84pc, garlic 1.82pc, washing soap 1.72pc, potatoes 1.57pc, cooking oil (5 litre) 1.50pc, bananas 1.40pc, georgette 1.32pc, eggs 1.31pc and vegetable ghee (2.5 kg) 1.25pc. The import bill is inflating because of an abnormal surge in commodity prices. Energy prices, including oil, LNG or coal prices are following an upward trend. While chemicals, steel and food prices are also on the rise.

Prices of petrol and diesel have increased by 14pc and 8pc, respectively, every year for the last three years. The per-unit electricity rate has also gone up more than 16pc per annum in three years of the PTI government. Vegetable ghee has risen by 27pc/kg every year on average for the last three years. Retail prices of cooking oil, sugar and pulse (Mash) have gone up 23pc, 22pc and 21pc, respectively, every year since October 2018.

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. 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.