BEGGARS BEG IMF

By: Hassan Shahryar

Ever since Pakistan was struck by the Covid-19 wave, authorities succeeded in imposing lockdown across Pakistan. By effective means of lockdown, local economic activities were still at large. Massive vaccination campaigns, Benazir Income support program, accommodative policies helped public to steer clear in adverse effects of the pandemic. As a result, the real GDP in 2015-16 rallied to 5.6% in fiscal year 2021, after dwindling 1.0 % in Fiscal year 2020.  

Nevertheless, low productivity growth and structural weakness pose risk to conjure recovery. Demands which cannot be met due to previous fiscal and monetary policies and off course an ongoing less propitious external environment for our exports has bred high current account deficit.  

According to experts, all the economic indicators were responding positive during the months of July- December in 2021. A community’s maneuverability, cash inflow and   enhanced private consumption amongst public indicated a step towards more strengthened economy. Increased investment with rapid growth of machinery imports and government’s expenditure on development indicated the stability of Pakistan’s economy.  

However, our large-scale Agro-based product’s, growth rate seems promising as sugar cane and production of rice increased, reflecting better weather conditions. Large-scale manufacturing rose by 7.5% in year 2022 which is 1.5% higher than it was in year 2021. In divergence of it all, business and consumer have fallen since June 2021 due to higher inflation and interest rates.  

• Inflation has hit our economy so badly that consumer is advised by the authorities to consume less of everything. Inflation is 2022 rose by 9.8% from 8.6% in year 2021. Similarly core inflation has been increasing since September 2021.  

• Current account Deficit widened to US$9.0 Billion from Surplus of US$1.2 Billion. 
• Imports values surged by 54.4 % whereas growth in export value 27.3% 
• Financial account net inflow US$10.1 Billion 

These conditions are supported by IMF’s allocation. Short-term deposits from our Allys like Saudia Arabia and a Eurobond issuance in July 2021 were obtained by our government. In January –February 2022, governments of Pakistan obtained US$ 2.1 Billion from International Sukuks and the IMF Extended fund facility (EFF). Despite these inflows our foreign exchange reserves declined by US $ 13.5 Billion by march 2022. Which is equivalent to 2 months of importing goods. Meanwhile the Rupee depreciated by 14.3% against US Dollars from July 2021 to March 2022. 

  Despite the high tax revenue and surge in imports the fiscal deficit widened by 20.6% in year 2022. Higher spending on vaccination procurement, settlement of power sector and development projects. 

• Public debt reached 70.7% of GDP at December 2021 whereas in December 2020 it was 72.0 % 
• Government approved a Supplementary Finance Bill in January 2022, which allows to withdrew tax exemptions, cutting back federal development spending, protecting social sector spending. 

Rising food and energy inflation has diminished the purchasing power of household commodities. Affecting the poor and fragile households that spend larger share of their budget on household products. However, the government at that time introduced targeted food subsidy program (Ehsaas Rashan Riyat ) in February 2022. 

Such macroeconomic measures and stronger inflation have slowed the real GDP growth rate by 4.3% in 2022. Our economy is expected to recover to 4.2% on year 2024. Despite of global inflationary pressure our governments needs to implement certain macroeconomic reforms that may narrow down the current account deficit by 3% of GDP.  

Speculating by the current situation implementation of such reforms would narrow our Current account deficit by year 2024.Reforms to reduced imports and increase exports will surely help our economy to get back of track. The fiscal deficit was expected to widen by 6.2% of GDP in year 2022. However increased GST and tax on income has taken hold of the situation. However public debt is still high but is expected to decline over a few months.