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Critical economic challenges

Pakistan’s recent economic crisis, brewing since last few years, intensified in the last quarter of fiscal year (FY) 2022 on account of unsustainable economic measures. This has diminished a large part of fiscal space, triggering an avalanche for the fragile economy of Pakistan. Reflective of the typical axiom, ‘living beyond one’s means’, our trade deficit gap between imports and exports widened to US$ 44.89 billion in FY 2022. This was the main reason behind the current account deficit (CAD) of US$ 17.4 billion.

Our GDP in the current fiscal year is going to witness a steep decline (may be negative). It is expected to grow marginally in the coming few years. The skyrocketing inflation is rising unabatedly, reaching historic high levels with every passing month. This uncontrolled inflationary trend is hampering the administrative abilities of the incumbent government and State Bank of Pakistan (SBP)—both have miserably failed to bring it down to a desirable level.

The rising cost of living testifies to the fact that the actions of fiscal tightening and monetary policy actions, taken by SBP, have failed to achieve the goal of mitigating inflation. The recent data issued by Pakistan Bureau of Statistics (PBS) confirm the same. During April 2023, the consumer price index (CPI) inflation increased to 36.4% on year-on-year (YoY) basis, compared to 35.4% in the previous month. The “Food & Non-alcoholic Beverages”, having a 34.58% weightage in CPI, witnessed inflation of 48.07% on YoY basis in April 2023. Similarly, “Housing, Water, Electricity, Gas & Fuels” (carrying 23.63% weightage) increased by 16.94%.

SBP and the government appear clueless in managing the unbearable inflationary pressure. Efforts to address the problem through high policy rate adjustments have utterly failed till today. Rather than achieving desired objectives, the all-time high policy rate of 21% has increased cost of doing business simply beyond affordable limits. It is now financially unviable to sustain cost of borrowed capital (with bank spread) hovering around 23% to 25%.

Pakistan, undoubtedly, is facing an extremely difficult situation, where the government is left with no other choice but to take aggressive measures for handling a daunting challenge of meeting ever-increasing foreign debt-servicing liability with limited levels of foreign reserves. Import restrictions in these circumstances have helped Pakistan to remain afloat during these tough times when global lenders are reluctant to extend a helping hand. Import restriction has substantially reduced trade deficit. During the first nine months of the current fiscal year trade deficit has shrunk to US% 20.4 billion compared to US$ 38 billion in the same period of the last fiscal year. During January to March 2023 quarter, current account balance turned positive with surplus of US$ 388 million, bringing down overall CAD during July to March 2023 to US$ 3.37 billion compared to US$ 13.01 billion, showing a significant reduction of 74%.

However, administrative and macroeconomic measures alone are insufficient and cannot work in isolation. The mayhem caused in currency market is a prime example of administrative incompetence of the government where parallel channels like alternative remittance systems (hundi and hawala) have flourished. These are being used to settle import-based payments. Increased activity in this parallel market has enabled operators to offer significantly better exchange rates than government, which is negatively affecting inflow of remittances through normal banking channels.

During the first nine months of current fiscal year, workers’ remittances declined to US$ 20.5 billion, which is approximately 10.8% lesser than US$ 23.2 billion in the same period of last year. Constant devaluation of Pak rupee, coupled with supply chain disruptions, has adversely affected business activity and is fueling inflation. The large-scale manufacturing sector has shown a decline of 5.56% during July-February of FY 2023 compared to the same period of last year. Thus, the latest GDP estimates, issued by the IMF, forecast a sluggish growth of 0.5% in FY 2023.

On the fiscal front, during the first nine months of current FY, there was a primary surplus of Rs. 781 billion compared to Rs. 399 billion in the same period of last year. However, due to higher borrowing and increased markup rates, fiscal deficit increased in absolute terms to Rs. 2392 billion, which is 2.8% of GDP as against 3.4% of GDP during first eight months of last year. The monstrous level of debt is posing a perpetual threat to economic sustainability. Despite year on year 18% growth in tax revenues and 35% in non-tax levies, the financial resources are insufficient to meet growing debt servicing needs.

Further, despite a noticeable improvement in tax collections, the overall performance is still lower than the target set for the first nine months of the current fiscal year, as the brunt of suppressed domestic economic activity and import compression is exacting a heavy toll on economy.

The stalled IMF programme is adding further misery in meeting the fiscal challenges. There is no hope of conclusion of the staff level agreement in the near future as both parties are blaming each another for the delay with regard to completion of the ninth review. According to a media report, the federal government violated the revised primary budget deficit targets agreed with the IMF as it issued supplementary grants of Rs. 620 billion. Therefore, the chances of achieving a surplus of Rs. 153 billion agreed with the IMF appear to be out of bound. The government might end up having a primary deficit of Rs. 440 billion equal to 0.5% of the GDP. Fiscal challenges coupled with political instability are causing immense damage to the social sector growth as well.

The World Bank’s Report ‘Pakistan Human Capital Review’ indicates that Pakistan’s ranking of 0.41 is low in both absolute and relative terms and is far behind the overall South Asia average of 0.48, whereas Bangladesh is at 0.46 and Nepal at 0.49. The report predicts that if the country followed the same path on human capital development, its per capita GDP growth will be a mere 18 per cent by 2047.

It needs to be realised that being the fifth most populous country in the world, we must act responsibly. The continuous political and economic instability are constant risks to our national security. Now we are facing a constitutional crisis as well. The three pillars of state must join hands to address common concerns. They need to work together to address the existing problems. The government should also utilize all its resources for effective mobilization and better expenditure management strategy so that we can enter into the next fiscal year with positive hopes, offering meaningful relief to the public and substantial decline in the bourgeoning fiscal deficit.

Huzaima Bukhari, Dr Ikramul Haq and Abdul Rauf Shakoori, "Critical economic challenges," Business recorder. 2023-05-05.
Keywords: Economics , Economic crisis , Monetary fund , State Bank , World Bank , Economy , Pakistan , Bangladesh , CAD , IMF , SBP , FY

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