Asrar Raouf describes the restraints on Pakistani economy and measures to tackle them
There is hardly any doubt in the Increasing pace of financial decisions that Pakistan is facing its worst economic exigency in years and its economic managers are left with very little space to rectify the fast-dwindling economy. The new government almost declared financial emergency when it slapped a ban on the import of luxury items with a view to bring about crucial savings to the national exchequer and also to reduce pressure on the fast-devaluing rupee. The new economic managers had taken time to increase the pace of measures aimed at ameliorating the difficulties primarily due to the fact that they had to face stiff opposition from the arbitrary quarters who were reluctant to let them play their hand freely. It is simply clear that the kind of belt-tightening the new managers have in mind is different than the one held by the arbitrary forces who want to pass on the financial burden to the masses that they have been doing since the last four years and have overwhelmed the common man with exceedingly high inflation.
The new government did not want to take the burden of decisions taken by the predecessors and made it clear that they do not want to further burden the common man. They were of the view that passing on the burden of the subsidies on fuel to the masses is unjust as the government has many other means to fund the amount of subsidy. There were attempts to browbeat them by a barrage of so-called economic experts coming on TV channels and pushing for increasing the cost of fuel but the government did not budge as they are practically on the verge of going back to the electorate and cannot face it after further burdening the people. Moreover, they do not have the kind of support of the arbitrary forces enjoyed by the previous government that was apparently given an immunity to run rough shod over anything coming their way. The new government is keenly aware that its only salvation lies in the support of people and they cannot afford to give that up as they are long-term players with deep political roots.
The new government has slowly picked up pace and that is what is customary with coalition government that have to take decisions by consensus and not by arbitrary decrees. In the latest measure the government has approved a plan to slap a ban on the import of 50 ‘luxury items’, including cars, mobile phones, cheese, jams, frozen food items, fish, dried fruit, cosmetics and tyres.
In taking this decision the government is required to seek approval of the World Trade Organization (WTO) and International Monetary Fund (IMF) as it is the prerogative of WTO to allow ban on imports and that too for a limited time frame. In this context the government plans to consult the IMF and is confident that it will obtain a certificate about the prevailing balance of payment crisis faced by Pakistan that would, in turn, allow Pakistan to apply the ban. The government has already made it clear that the ban would last few months to meet the requirement of the WTO.
Pakistan’s imports stood at $6.6 billion in April 2022 while in the first 10 months of the current fiscal year, the imports reached a record high at $65.5 billion. They can increase to $77 billion by the end of June. The current account deficit has already ballooned to $13.2 billion in nine months of the current fiscal year and it is estimated to widen to $17 billion to $18 billion by the end of the year if no corrective measures were taken. As the foreign currency reserves are depleting at an accelerated pace seriously restraining options available with the government and it was left with no recourse but to halt import of 50 luxury items. The government’s plan is to cut the current account deficit to $10 billion in the next fiscal year. It must also be kept in mind that Pakistan’s gross foreign exchange reserves are negative and with the new government unwilling to increase the cost of fuel the deficit will keep on increasing.
Along with taking tough decisions the government remained mindful of the fact that it does not step on too many toes and the result is that the estimated monthly impact of the measures is not more than $300 million clearly indicating that the government is to severely curtail economic growth in the new fiscal year leading to the next general elections. It was in this backdrop that the government did not accept the proposals to increase regulatory duties on imported goods and also rejected recommendations to ban import of cheese, chocolates and other foods largely imported from Europe. The European Union is Pakistan’s single largest export destination and helps Pakistan earn additional foreign exchange through the GSP plus tariff reduction scheme. However, such food items will be subjected to quantity restrictions aimed at lowering the country’s reliance on the goods to the extent possible without irritating the largest export destination’s partner. However, there is a possibility that the regulatory duties may be imposed from the next fiscal year.
On the other hand Pakistan resumed negotiations with the IMF in an effort to secure more funds from a $6 billion financial package agreed in 2019 to help shore up its falling economy. The coalition government sought to increase the size and duration of the loan programme as the foreign exchange reserves of the central bank declined to the level that can only cover less than two months of imports. The government is struggling with soaring inflation, while a surging current account deficit amid higher imports is putting pressure on the rupee. The proposal of withdrawing energy subsidies is still on the cards along with rolling back unfunded subsidies to the oil and power sector. It is pointed out that the government needs a positive indication from the IMF about the resumption of the loan facility. The currency is likely to be driven by the signals coming from the IMF on its reluctance to release the next loan tranche of around $1 billion.
Many economic experts are of the opinion that the unwillingness to pass on the petroleum price increase to the people has two effects pertaining to external deficit increases as oil continues to be imported in larger volumes because of low domestic prices and fiscal deficit and government borrowing rises because of subsidy instead of tax revenue on local petrol sales. It is therefore opined that that the IMF will not like this policy and will surely criticise it and would push the government to shift the burden accordingly. It is also mentioned that the rupee is falling not only due to the government not passing on the fuel price increase but also because of continued uncertainty on the local political and economic front. The political uncertainty is surely the worst negative impact on the current health of the economy rather than finding ways to fund the amount of subsidies. The government however cannot ignore the pressure exerted on rupee as it has passed the 200 mark to the dollar continuing its sharp slide for the seventh consecutive session. TW