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Emerging risks

The prospects for the economy of Pakistan are shrouded by growing uncertainty and risk factors, due to developments both on the external and domestic fronts. The pre-dominant concern currently is about the spread of Omicron and its impact on growth in the global economy and in Pakistan. There is a risk that it will impede the on-going revival. There has fortunately not yet been a significant spread of the mutant in the country.

The first attack of the Coronavirus in 2020 had led to a precipitous fall in international commodity prices. For example, the price of crude oil plummeted to $43 per barrel by end of 2020. It has since risen to a peak of $82 per barrel and fallen recently to $76 per barrel. Other commodities have generally not yet shown a fall in prices following the global spread of Omicron.

The Government and the SBP are both expecting international commodity prices to fall in coming months thereby helping in containing the trade deficit and the rate of inflation. But there is a growing perception now that the Omicron attack is relatively mild in nature. The oil price has started rising again and there are even some projections that the price may approach $100 in 2022. Therefore, there is the risk that international commodity prices will remain relatively high next year.

The second big risk factor relates to the future of the IMF Programme. The sixth review remains incomplete. The government was expected to implement a set of prior actions, including a mini-budget and a bill for granting greater autonomy to the SBP. But for unclear reasons, this process has been delayed. If this does not happen within the next week then the completion of the Sixth review will not be taken up by the IMF Executive Board on the 12th of January and lead to a delay in the release of $1 billion.

The question and the associated risk are what the government’s steps will be and their timings with respect to the IMF Programme? The prior actions could be implemented in a longer time frame, but this will add to greater uncertainty and precipitate in the interim period an even faster fall of the rupee.

The future of the IMF program also has a strong bearing on the extent of success in meeting the external financing requirements in 2021-22. The SBP has indicated that the required magnitude is $26 billion. By the end of November, approximately $12 billion of financing has come to Pakistan. If the IMF program remains suspended, then the remaining $14 billion will be both more difficult and costlier to arrange.

Meanwhile, there is some turbulence in the foreign exchange market due to the prevailing uncertainty. The difference between the open market and the inter-bank exchange rate has widened. Apparently, the rupee is trading at 7 to 8 Rs lower per dollar in Dubai. The ‘hawala’ transactions may be back in a big way. A significant drop in the official inflow of remittances will put even more pressure on the current account deficit.

The high current account deficit and the large debt servicing obligations have also begun to put pressure on the foreign exchange reserves with the SBP. Between the end of August and the 18th of December 2021 reserves have fallen by almost $1.5 billion. This process of decline will continue to put pressure on the rupee.

The SBP has taken some steps to control operations in the foreign exchange market. However, they are beginning to be seen as somewhat ‘panic’ moves and adding instead to currency speculation. A big positive move towards stabilization and possibly appreciation in the value of the rupee will be following the completion of the Sixth Review of the IMF Programme and receipt of $1 billion.

Turning to the domestic risk factors, the first area of concern is the quantum of on-going gas load-shedding. Indications are that it is sizeable and industrial production has been significantly impacted. The months of December and January are usually output peak months in the Quantum Index of Manufacturing (QIM) and as such the loss of output could be sizeable. The risk factor is the extent of the consequential fall in exports, especially by the textile sector. This will exacerbate further the size of the current account deficit.

The other uncertainty relates to major crop outcomes in 2021-22. Apparently, there has been a sizeable increase in cotton output. But in the first five months of 2021-22 there has been a 31 percent jump in raw cotton imports. Outlook for Rabi crops, especially wheat, has been rendered problematic by the shortage of fertilizer and the big jump in prices.

On the industrial front, even prior to the impact of gas load-shedding, there was a decline of 1 percent in the QIM in October. Overall, the outlook for economic growth is much less sanguine than what it was following the presentation of the Federal Budget in June. It will not be surprising if instead of a growth rate expectation of 5 percent, the actual increase in the GDP could be limited to only 3 to 3.5 percent.

Finally, there are growing uncertainties also on the budgetary front. The hike in the policy rate by 2.75 percentage points could add over Rs 200 billion to the cost of debt servicing in 2021-22. A shortfall of over Rs 300 billion is likely in the petroleum levy. The cash surplus by the Provincial Governments could be over Rs 200 billion less than the budgeted amount. Revenues of Rs 130 billion from the GIDC will largely not be realized. SBP profits could also be less than the budgeted amount of Rs 650 billion if the profit determination formula proposed by the IMF is implemented. The year could end with a budget deficit which is almost Rs 400 billion larger even after the mini-budget and the cut of Rs 200 billion in the Federal PSDP.

Overall, the next few months of 2021-22 are likely to be characterized by a high level of uncertainty on the economic and political fronts. The country may fall back once again into ‘stagflation’ while both the current account and budget deficits could remain at relatively high levels. Even if the IMF Program continues till September 2022, the big question is how the large external financing requirements will be met thereafter?

, "Emerging risks," Business Recorder. 2021-12-28.
Keywords: Economics , Economic growth , Emerging risks , Commodity prices , IMF programme , Crude oil , Foreign exchange , Pakistan , PSDP , IMF , GIDC

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