Economy of Pakistan: A persistent quandary and predicament

Pakistan is yet again facing a gigantic economic crisis and it appears that the country is losing on its options to revive as these get perpetual. Pakistan’s GDP is expected to touch a 4 year high of 5% in the fiscal year ending June 2022. However, the country is devastated due to heightened inflation and inflationary risks. A persistent balance of payment crisis has the country’s economy stumbling, completely dependent on external debt bailouts to stay afloat.

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In the past too Pakistan has on various occasions faced severe macro economical problems such as – currency devaluation, depleting foreign reserves, trade deficits and runaway inflations. Currently, the major challenges for the country’s economy include that of consecutive build up of inflationary pressures and a payment crisis that has been ongoing for years but has become increasingly rugged now. The increment in inflationary pressures is gradually resulting into civil instability as the resentment among the masses grows – the pandemic has exacerbated the situation for the already ailing economy. As of November 19th Pakistan’s entire liquid foreign reserves stood at $22.773 billion according to the State Bank of Pakistan (SBP), the country’s central bank. Of the $22.773 billion, 16.254 billion was held by the SBP and the remainder was with commercial banks. The SBP’s reserves plummeted by $691 million in this week alone due the repayment of external debts, as reported by Geo-News. The annual economic growth of Pakistan was at 5.8% in 2018, to put this in perspective the average annual growth rate of the developing world was 6.5% (India 6.8%). In 2019, Pakistan’s annual growth rate plummeted to 0.99% and further to 0.53% in 2020, according to the World Bank. This stagnant growth rate has lead to a deficit build-up on the current account. A persistently high deficit can lead to inflation, which negatively impacts the value of the currency – the reason of Pakistani Rupee’s declension. With the rapid downfall of growth and the pressure to payoff the increasing debt, the country yet again faced a balance-of-payment crisis. A BoP is inflicted when a country is unable to finance its imports or service its external debt. Pakistan’s imports are largely of essential commodities for domestic consumption meaning a greater pressure on the layman. Running out of options, Pakistan leaned towards the International Monetary Fund (IMF) for a $6 billion bail out, the country committed to structural reform and on reduction of public debt. However, the plan of the funding package came to a halt earlier this year over issues related to reform commitments and an agreement could only be reached by the 22nd of November.“The Pakistani authorities and IMF staff have reached a staff-level agreement on policies and reforms needed to complete the sixth review,” the IMF said in a statement that day. After the review’s completion, $750 million in IMF special drawing rights (around $ 1 billion) could be availed by Pakistan, taking total disbursements to $ 3 billion. Shaukat Tarin, the equivalent of Pakistan’s finance minister, pledged to undertake four other actions – elimination of tax exemptions and subsidies, increase in levy on petroleum products, increment in power tariffs and an audit of approximately $1.4 billion in “extra funds” lent to Pakistan in April 2020 due to the pandemic. Pakistan’s government bonds jumped between 1.3 and 2.8 cents on the US$ as a consequence of the deal, their best day in over a year, according to Reuters data. Saudi Arabia once again came to the rescue of Pakistan after Islamabad got a desperate $3 billion loan from Riyadh, the sum would remain in the SBP’s deposits for a year. Previously, in November 2018 too Saudi had bailed out Pakistan with a $3 billion loan out of which $1 billion were reported as being disbursed. Muzammil Aslam, spokesperson for the Prime Minister Finance Advisor said that the country was expecting $7 billion from three sources within the next 60 days, these are $3 billion from Saudi Arabia, $1.2 billion from a Saudi oil facility with differed payments and $800 million from the Islamic Development Bank oil facility. These according to Aslam, would suffice for releasing pressure on the country’s import bills. However, overtime Saudi Arabia has become more stern with Pakistan, it is charging a 4% interest rate on the loan, there are restrictions against legal recourses Pakistan might avail for against any Saudi claim, default clauses too are draconian. Surging inflation is severely hurting the country’s economy, headline inflation surged to a record 11.5% in November from 9.2% in October. Rising inflation is leading to civil unrest within the country as citizens struggle to fulfil their requirements of essential commodities. The month of November also brought Pakistan’s food inflation in the double digits, the country’s food inflation has on and off remained in double digits since mid 2019, reaching as high as – 23.6% in January 2020, 17.8% in July 2020 and 15.9% in April 2021. The Chairperson of the Consumer Association of Pakistan, Kaukab Iqbal stated: “The rising prices of food items, particularly fresh fruits, milk, and chicken are having a major impact on the livelihoods and nutrition levels of all families. But much of the burden of this falls on the poor as higher prices put protein and vitamin-rich foods out of their reach.” There are other external causes too for inflation, however in case of Pakistan we see mismanagement of resources too as a credible source for the issue. Pakistan has what it calls ‘systematically penalised’ the production of other high value products and laid emphasis on wheat and sugarcane by providing support for them – according to a World Bank paper. Despite having more than sufficient number of animals, the country has to import dairy products. The country also has to import horticulture products and cotton for the textile industry. Pakistan’s current account deficits have been way larger than anticipated for September and October, due to rising commodity and oil prices and increment in domestic demand. These factors have come down heavily on the Rupee. The balance of risks has shifted away from growth and towards inflation and the current account faster than expected. Pakistan is likely to grow about 5% in fiscal year 2021-2022 (July – June annual cycle), SPB governor told CNBC Reza Baqir on November 24. “This is a four-year high and this growth is reflected in robust and brisk demand of even non-energy imports in Pakistan,” he said. Fitch solutions had predicted a growth of 4.2% in the year ending July, 2022 – much lower than Baqir’s estimations. His assertions are also more optimistic than the government’s target of 4.8%. On November 24, the SBP raised its policy rate by 150 basis points to 8.75%, stating that “risks related to inflation and the balance of payments have increased while the outlook for growth continued to improve{. The bank also lifted the cash reserve requirement for commercial banks by one percentage point, the first such move in over a decade.
But Baqir has asserted the government has to do more to bring down inflation, including actions to ensure “there’s no hoarding or price speculation for basic commodities”. It is needless to say that a country’s economic, political and social conditions are heavily interdependent on each other and Pakistan is facing severe challenges on all three fronts. The government needs to take meticulous steps in order to mitigate the situation.