By J. Choudhry
The New Year 2022 is commencing with multiple challenges for Pakistan on domestic and external economic fronts. In January 2022, the International Monetary Fund (IMF) is expected to resume disbursement of the suspended $6 billion package for Pakistan. But the core question is that will the resumption of financial support by the IMF be sufficient to meet the key economic challenges in 2022 and beyond? This discussion has gained a center-stage in Pakistan as the important economic indicators are demonstrating deterioration consistently while the consumers, business men and industrialists are bewailing over inflation, increase in cost of doing business, unabated hike in the value of dollar, national debt, and prices of many essential consumer items, including electricity, gas, edible oil, etc. The New Year 2022 is commencing with multiple challenges for Pakistan on domestic and external economic fronts. In January 2022, the Inter- national Monetary Fund (IMF) is expected to resume disbursement of the suspended $6 billion package for Pakistan. But the core question is that will the resumption of financial sup- port by the IMF be sufficient to meet the key economic challenges in 2022 and beyond? This discussion has gained a center-stage in Pakistan as the important economic indicators are demonstrating deterioration consistently while the consumers, business men and industrialists are bewailing over inflation, increase in cost of doing business, unabated hike in the value of dollar, national debt, and prices of In December 2021, Prime Minister Imran Khan himself explained that the government was getting IMF support to cope with the yawning trade and current account deficits which are already putting pressure on the value of rupee against the US dollar and other major currencies. In three and a half years rule of the PTI government, the value of dollar has already surged around 58 to 60 rupees. For example, when the PTI came to power, the dollar-rupee exchange rate was fluctuating around 118 rupees, now this exchange rate has widened to 178 rupees in the inter-bank and above 180 rupees in the open market.
Meanwhile, economic analysts are of The PTI government claims that the opinion that the IMF bail-out page bail-out package is essential to would only be a short-term relief for the economy of Pakistan while in the long-term, it would create more troubles for consumers, business community, and taxpayers in the country. In this article, we highlight the positive and negative points of the IMF programmed for Pakistan in 2022 and beyond it.
strengthen the foreign exchange reserves, dollar-rupee exchange rate and to fulfill payment of external debt in 2022. However, the critics and opponents of the government believe that the IMF programmed has already unleashed a rein of price-hike in the country through implementation of some of the upfront measures and the IMF requirements would further trigger inflation in the backdrop of further increase in power, gas tariffs, elimination of subsidies, tax generation of more than 300 billion rupees in FY2021-22 through mini-budget and increase in petroleum levy by at least four rupees per liter in a month till the time it reaches 30 rupees/liter level.
Before resuming the suspended programmed, IMF has given a task to the PTI government to accomplish some of the upfront measures. Most important measures are further amendment in the State Bank of Pakistan law which guarantees complete autonomy for the central bank. Furthermore, the IMF has proposed a complete elimination of subsidies, rationalization of the general sales tax slabs, and additional generation of more than 300 billion rupees tax revenues and phased-increase in petroleum levy, electricity and gas tariffs through mini-budget during the current financial year 2021-22.
Interestingly, the government has estimated a total of $7 billion inflows in next couple of months from the day the IMF resumes lending to Pakistan. This also includes inflows of $3 billion. Cash loan from Saudi Arabia which Pakistan had already received as the amount had been deposited into the account of the State Bank of Pakistan (SBP). The Saudi loan carries an annual payment of four percent mark-up.
Also, in addition to $1 billion IMF loan, expected to be handed over to Pakistan in Jan-2022, the PTI government expects the disbursement of about three billion dollars loans from the World Bank, ADB and other multi- lateral lending organizations. The government expects that the country will be able to attract much-awaited foreign investment. Dollar-rupee exchange rate is another area of concern for all and sundry in the country and the Prime Minister and others in the government are claiming that rapidly expanding current account deficit is eroding foreign exchange reserves and deteriorating the value of rupee against the US dollar and other major currencies.
For example, in the first four months of the ongoing fiscal year 2021-22,
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Pakistan’s current account deficit has increased four-fold and during July Oct FY22, it widened to 5.18 billion dollars in comparison with just 1.21 billion dollars current account deficit in the corresponding period of last fiscal year.
According to State Bank of Pakistan, the trade deficit of Pakistan has widened to 15 billion dollars during July- Oct 2021 period of this fiscal, whereas in the corresponding period of last fiscal the trade deficit stood at 7.56 billion dollars only. In other words, the trade deficit has expanded by almost 100 percent, surging to 15 billion dollars from 7.5 billion dollars in July-Oct period in 2020. Also, the country has closely missed the exports target set for the first four months of this financial year. During Jul-Oct period of FY22, exports amounted to $9.49 billion against the quarterly target of $9.6 billion. On an average, Pakistan earned $2.36 billion through exports which was below the expectations.
According to adviser to prime minister on commerce and trade, Razzak Dawood, the exports of Pakistan fell below the target in first four months of FY22. In October 2021, the target of exports was also missed as exports increased to $2.47 billion, but missed the target of $2.6 billion. However, in first four months the exports grew by 25%, mounting to $9.468 million as compared to $7.57 billion during Jul-Oct 2020, Pakistan’s exports in October 2021 grew by 17.5% to $2.471 billion the highest ever export recorded in any Oct 2021.
An alarming problem is that the national imports have expanded by 64 percent during Jul-Oct 2021 and increased to $25 billion as against to $15.2 billion during the corresponding period of last fiscal year. Thus, in US dollars the imports have edged up by $10 billion.
Forex Reserves and Dollar-PKR Exchange Rate In December 2021, the national foreign exchange reserves have crossed 25 billion dollars level. The forex reserves were on the decline, but Saudi loan strengthened reserves above 25 billion dollars. Unfortunately, this positive development could not make any dent into the growing value of the US dollar and the rupee continued to shed its value.
For instance, by mid-December 2021, the dollar-rupee exchange rate in the inter-bank operations again surpassed 178 rupees level while in open market the dollar-rupee parity hit 180 rupees record level. In fact, in the open market, the US dollar is black-marketed at exorbitant rates in the absence of a check and balance system for the money exchange companies. Furthermore, the current account deficit and trade deficit are being termed the two major factors driving up the value of dollar and other leading currencies. When the PTI formed its government in August 2018, at that time the dollar-rupee value was fluctuating around 118 to 119 rupees. Thus, in just three and a half years rule of the PTI government, dollar has edged up by around 60 rupees, causing a serious blow to the Pakistani currency, consumers, imports, and cost of doing business at international level and in domestic markets. As the IMF has tightened the hands of the PTI government under the revised deal, the value of rupee had been left to the will of the market forces in the country and some dollar-crazy elements are frequently playing with the exchange rate mechanism to mint as much money as they desire.
Pakistan’s debt and liabilities hit 50 trillion rupees in Sept 2021.
Most importantly, the current debt and liabilities of Pakistan have sur passed 50.5 trillion rupees mark in Sept-2021. This debt burden surged by 20 trillion rupees in three-year time of the government, State Bank of Pakistan issued this startling data in the month of Nov 2021. The data exhibits the government’s continuous reliance on borrowings from the domestic and external sources.
Stunning Crash of Stock Market
On December 2, 2021, the Pakistan Stock Exchange (PSX) got the limelight in media in the country and abroad as it crashed with a massive single-day decline of 2,005 points in the KSE-100 benchmark index. On that day the stock market opened trading with 45,369 points, but within hours the 100-index started bleeding with rapid erosion of shares value and unprecedented scale of selling pressure. Hence,
the PSX closed with a net loss of over 2,135 points which shocked everyone in the country and overseas. The reasons which the market’s pundits cited behind this great fall were not the new…. but the fact is that the market players found an opportunity to express their concern against a consistent and an alarming increase in the trade and current account deficits, unabated decline in value of Pakistani rupee and recent hike in the SBP’s discount rate to 8.75pc. On Dec 14, 2021, the State Bank further raised the discount rate to 9.75 percent, setting aside demand of business persons to avoid further increase in the interest rate. On Dec 9, 2021, the benchmark index of PSX closed at 43,386 points, losing about 459 points. Some stock market analysts, economists, and politicians have declared this massive decline in the stock market in a single day as a no-confidence of investors against the economic policies of the PTI government. As the State Bank has further jacked up the discount rate, stock market investors are expected react further in the days ahead.
In November 2021, IMF announced that its staff and the Pakistani authorities have reached a staff-level agreement on policies and reforms, which were essential to complete the sixth review under the EFF IMF said the agreement is subject to approval by its Executive Board, following the implementation of upfront actions by Pakistan, pertaining to fiscal and
institutional reforms. The Fund states. the completion of the review would lead to disbursement of 750 million Special Drawing Rights (SDRs). In the US dollars, this amount will be equal to US$1.059 billion. Its disbursement would increase IMF’s total release of amount under the EFF to US$3.027 billion. According to IMF, the resumption of the bail-out package would unlock significant funding from bilateral and multilateral partners for Pakistan. In April 2020, the IMF provided additional $1.386 billion to help Pakistan overcome the economic impact of the COVID-19 shock.
Despite a difficult environment, progress continues to be made in the implementation of the EFF-supported program. All quantitative performance criteria (PCs) for end-June were met with wide margins, except for that on the primary budget deficit. Notable achievements on the structural front include the finalization of the National Socio-Economic Registry (NSER) update, parliamentary adoption of the National Electric Power Regulatory Authority (NEPRA) Act Amendments, notification of all pending quarterly power tariff adjustments, and payment of the first tranche of outstanding arrears to independent power producers (IPPs) to unlock lower capacity payments fixed in renegotiated power purchase agreements (PPAs). The authorities have also made progress in improving the anti-money laundering and combating the financing of terror- ism (AML/CFT) framework, although some additional time is needed to strengthen its effectiveness.
On the macroeconomic front, IMF said the available data suggests that a strong economic recovery has gained hold, benefiting from the authorities’ multifaceted policy response to the COVID-19 pandemic that has helped contain its human and macroeconomic ramifications. The Federal Board of Revenue’s (FBR) tax revenue collection has been strong. At the same time, external pressures have started to emerge: a widening of the current account deficit and depreciation pressures on the exchange rate mainly reflecting the compound effects of the
stronger economic activity, an expansionary macroeconomic policy mix, and higher international commodity prices. In response, the authorities have started to adjust policies, including by gradually unwinding COVID- related stimulus measures. The State Bank of Pakistan (SBP) has also taken the right steps by starting to reverse the accommodative monetary policy stance, strengthening some macroprudential measures to contain consumer credit growth, and providing forward guidance. In addition, the government plans to introduce a package of fiscal measures targeting a small reduction of the primary deficit with respect to last fiscal year based on: (1) high-quality revenue measures to make the tax system simpler and fairer (including through the adoption of reforms to the GST system); and (ii) prudent spending restraint, while fully protecting social spending.
These policies will help safeguard the positive near-term outlook, with growth projected to reach, or exceed, 4 percent in FY 2022 and 4.5 percent the fiscal year after that. However, inflation remains high, although it should start to see a declining trend once the pass through of rupee depreciation is absorbed, and temporary supply-side constraints and demand-side pressures dissipate. However, the current account is expected to widen this fiscal year despite some export growth, reflecting the rising import demand and international commodity prices. However, this economic outlook continues to face elevated domestic and external risks, while structural economic challenges persist.
Advancing the strategy for the electricity sector reforms, agreed with international partners, is important to bring the sector to financial viability, and tackle its adverse spillovers on the budget, financial sector, and real economy. In this regard, steadfast implementation of the Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, timely alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable. Substantially lowering supply costs, however, will require a modern electricity policy that (i) ensures that PPAs do not impose a heavy burden on end-consumers; (ii) tackles the poor and expensive generation mix. including a wider use of renewables; and (iii) introduces more competition over the medium term.
In the prevailing circumstances, instead of pursuing the IMF agenda with full force, the PTI government must evolve a strategy that averts erosion in the stock market, value of rupee, contains the trade, current account deficits and inflation as well to make sure the business community and consumers feel comfortable with economic policies of the government in 2022 and beyond it. By April 2023, the PTT government would have to hand growth, over the government to the caretakers to pave the way for the general elections. The success of the PTI in the general elections is strongly connected with its prudent economic policies.