Asrar Raouf comments upon the evolving Limited economic space situation
The chances of Limited economic space sustenance were further deepened when it was reported that the trading account of Pakistan recorded a deficit of $23 billion during the first nine months of this fiscal year rated to be 83% of the annual target because of reduction in imports was offset by a deep decline in exports. The reported gap between imports and exports was down $12.6 billion or 35.5%, year-on-year basis. It was pointed out that the annual export target was set to $38 billion but only 56% of this was achieved in the first nine months as the exports recorded in this period was just $21 billion down by $2.3 billion, or 10% while imports amounted to $44 billion, down by $15 billion, or 25 per cent. It is mentioned that though lower imports helped contain the current account deficit to around $4 billion but it has camouflaged the rapid deterioration in exports. The problematic aspect of the situation is that Pakistani exporters have failed to take advantage of the steep currency devaluation thereby not of any help to the economy. On the other hand, the projected import target was around $65.6 billion by the end of the current fiscal year but currently it has come up to 68% of that target in nine months. The difficulties caused by arbitrary controls over the import has depressed imports but now the pressure is on by the State Bank of Pakistan exerted by the IMF to withdraw the repressive instructions and instruct the banks for priority allocation of dollars.
The economic situation of the country is indeed precarious as the World Bank has urged the government to immediately arrange fresh foreign loans to avert a public debt crisis. It has warned that the economic future of Pakistan remains uncertain with economic growth remaining flat with an average inflation rate of 29.5% for the current fiscal year. In the absence of public transfers that cover income losses or mitigate the impact of higher prices the poverty is projected to increase to 37.2% pushing an additional 3.9 million people into poverty as compared to last year. The World Bank said that the inflation outlook suggested that real interest rates will remain in the negative possibly warranting further policy tightening in the near-term. The World Bank emphasised that implementing macroeconomic and structural reforms agreed under the IMF programme and securing the much-needed external refinancing is critical to restoring macro-stability, confidence and averting a public debt crisis. The underlying issue is that this report indicates growing discomfort among international creditors due to Pakistan’s inconsistent fiscal and monetary policies.
The World Bank pointed out that Pakistan’s external financing needs are projected to be on an average, $28.9 billion per year calculated at 8% of GDP, during 2023- 20225, including IMF repayments, maturing Eurobonds and repayments against Chinese commercial loans. The serious problem is that improving the reserve position is a marathon run and Pakistan has very few opportunities to do so. Analysts opine that the IMF programme is an anchor for the country as the economic outlook is highly uncertain and hinges on strong political ownership and effective implementation of critical reforms. It is mentioned that non-completion of the IMF programme and failure to secure expected rollovers, refinancing and new financing from key bilateral partners presents major risks. It is further mentioned that Pakistan has minimal economic buffers to withstand any additional domestic or external shocks and this situation is needed to be addressed as soon as possible.
The risk factors are increasing as is borne out by the analysis that even with the IMF programme reserves are expected to remain precariously low and the only way to arrive at a sustainable stability would need that fiscal and monetary reforms are undertaken with a view to streamline the economic structure that is widely rated to be lopsided and will render any short-term measures untenable. The tendency to consistently give in to politically-driven slippages in fiscal policy in the context of upcoming elections, constraints on foreign exchange liquidity and uncertainties around external funding inflows, rising levels of public debt, growing exposure of banks to the public sector and political instability are certainly the factors that will keep the economy under sustained pressure. It was also reported that the outflow of dollars has decreased by 80% during the first half of 2023 badly impacting investor confidence and the result is Pakistan effectively losing access to international capital markets. The economic managers of the country are therefore warned to resist departing from the current macroeconomic framework because any mistake at this point in time is going to exacerbate external and domestic financing risks and potentially place debt on an unsustainable path. The only way forward is sustained macro-fiscal and structural reforms so that fresh financing is made available along with recovering the private investor confidence.
The current economic downturn has now started to negatively affect the nerves of the financial wizards of the coalition government as is evident by the cancellation of the visit of the incumbent finance minister to America where he was scheduled to meet the management of the IMF for removing the impediments placed in the final settlement of the stalled bailout package. The cancellation of his visit also implies that he will not attend the spring meetings of the World Bank-IMF that were taking place from 10-16 April in Washington. Ishaq Dar had scheduled meetings with the presidents of WB, Asian Development Bank and Asian Infrastructure Investment Bank – the three multilateral creditors that are considered crucial for raising financial capital. The finance minister was also set to meet with the representatives of the three international credit rating agencies that had downgraded Pakistan that had temporarily closed down the doors for borrowings from international capital markets. The finance ministry had also lined up meetings with the representatives of the foreign commercial banks aimed at convincing them to provide commercial loans to meet the external financing requirements.
It was reported that during the course of discussion the subject of a steep fall in collection of revenues in Pakistan was also to be brought upon. Pakistani tax collection machinery has been unable to fulfill the revenue collecting targets set by the government and it is reported that a shortfall of Rs.276 billion now stares them in the face. The incumbent finance minister was scheduled to begin his trip with an opening meeting with the IMF’s Mission Chief to Pakistan and it was crucial to bring back the talks on rails as currently Pakistan and the IMF are no more actively negotiating after the government’s sudden move of announcing petrol subsidies and though it claimed that the petrol subsidy would not affect the budget but this plan created further problems. It is quite clear that the deepening political uncertainty and the disruptive judicial crisis made his travel impossible as he feels ill-equipped to parley with the financial heavyweights of the western world and describe to them issues regarding continuity of the government, future economic plans. These issues are directly related to the lack of ability to bridge the trust deficit with international multilateral lending institutions. The finance minister’s decision to pull out might also lead to cancellation of meetings with his Saudi Arabia counterpart and the UK state minister for development. TW