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Dr. Ikramul Haq & Abdul Rauf Shakoori
After assuming power in April 2022 the alliance government of Pakistan Democratic Movement (PDM) has intentionally taken a number of measures, to slow down economic activities in the country. Aimed at “cooling down” the unsustainable economic growth, these steps presumably overturn unwise policies and end imprudent actions. For example, unfunded subsidies by the previous coalition regime of Tehreek-i-Insaf (PTI), have already rendered the outlook of economy bleak. The overall economic system is on the verge of a collapse—risk on external front is much greater and may not be mitigated in the near future. Owing to these aggressive corrective measures, the immediate threat of economic breakdown seems averted.
During the last seven decades, we have witnessed multiple cycles of boom-and-bust. Since the sixties our economy has been growing at a reasonable pace. However, after brief sprints of progress, pressures on external front resurface at alarming levels. For countering the same, the overall economic activity level is deliberately slowed down through contractionary/austerity measures. This recurrent pattern is indicative of the fact that Pakistan’s growth is heavily import-based.
In pursuing higher economic growth, we end up having unsustainable import bill resulting into monstrous current account deficit. Unfortunately, this and other deficits, most notably fiscal and trade, in the past were bridged through borrowings—internal and external. The obvious result is accumulation of huge, unsustainable external debt that is now over US$ 130 billion. The forcibly reduced activity level may help in bringing down the trade and current account deficits. However, our fiscal constraints at this time do not allow us to repay debts that would be due in the coming days, unless requests to the lenders to reschedule or rollover are accepted.
Our foreign exchange reserves have been constantly depleting for the last few years. These dwindled down to US$ 11.5 billion in December 2022. The main reason was reckless borrowing by the PTI government during its tenure (August 18, 2018 to April 5, 2022), without having any notable projects to its credit. Then government frantically secured foreign debts from multilateral partners, commercial banks and through issuance of debt instruments increasing the country’s debt profile by around US$ 35 billion. It is pertinent to mention that during the last eight months of PTI government i.e. July 2021 to March 2022, foreign exchange reserves reduced from US$ 27.067 billion to US$ 17.426 billion—an approximate monthly reduction of US$ 1.205 billion.
It is worthwhile to note that during the nine months rule of PDM government, foreign exchange reserves went down by US$ 6 billion (including two major payments of bonds and to UAE banks) from March 31, 2022 to December 31, 2022, registering an average monthly reduction of US$ 600 million.
Depletion of foreign reserves is currently being halted through curtailment of imports, imposition of cash margin requirement, pre-approval letter of credit requirements and multiple other administrative measures. Moreover, in an effort to resume the Extended Funded Facility (EFF) programme of International Monetary Fund (IMF), the government has revoked all subsidies on fuel and energy that has triggered high inflation. These steps have been taken together with constant upward revision in policy rate (presently 16 percent) by the State Bank of Pakistan (SBP). Over a period of almost 15 months, the policy rate has more than doubled from seven percent in September 2021 to sixteen percent in December 2022. The exuberant increase in policy rate has virtually closed all avenues of growth and business expansion in the country. Businesses are even finding it very difficult to bridge their working capital requirements.
Another challenge faced by the present government is constant reduction in exports and foreign remittances. These two work as first line of defence to curtail the current account deficit. After taking these into account, the remaining deficit has always been filled through borrowings. Due to a high rate of inflation of over 20 percent, increased cost of doing business and an unstable exchange rate, our exports and remittances are declining.
Exports are reduced to US$ 2.3 billion in December 2022, 16.6 percent lower than US$ 2.7 billion in December 2021. For six months period i.e. July 2022 to December 2022, overall exports lingered at US$ 14.249 billion that was approximately 5.8% lower than US$ 15.125 during last year’s corresponding period. Similarly, based on data available to date, remittances during July to November 2022 were reported at US$ 12 billion that were 9.6% lower than US$ 13.3 billion during July to November 2021.
The significant reduction in remittances is directly attributable to administrative failure and imprudent policies of the PDM government. The interbank exchange rate (currently 1US$: Rs. 227) is not reflective of open market dynamics where one American dollar fetches around Rs. 260. This difference of around 15% is making official channels unattractive and resultantly informal open exchange market is flourishing. PDM government’s myopic approach in artificially maintaining dollar rate lower than actual floating/market rate is costing heavily to Pakistan.
Apart from economic challenges on external and internal fronts, Pakistan witnessed catastrophic flash floods in 2022 after unprecedented rains due to global climatic changes for which it bears no responsibility. The floods caused heavy losses of over US$ 30 billion and disrupted the economic activities in sectors like agriculture, livestock etc, besides damaging infrastructure completely.
At start of Quarter II of FY 23 SBP estimated that GDP growth could reduce to around 2% in FY23—the initial growth forecast of 3% to 4% before the floods is redundant now. It is heartening to note that international community has recognised its responsibility and pledged nearly US$ 10 billion in the coming three years at the recently concluded International Conference on Climate Resilient Pakistan in Geneva.
The impact of contractionary measures has started taking its toll on economy—confirmed by statistics, issued by the Ministry of Finance in its Economic Outlook for December 2022. The growth of large scale manufacturing (LSM) on year-on-year (YoY) basis plunged by 7.7% in October 2022—during July to October of FY 23 it witnessed contraction of 2.9 percent. The fiscal deficit during July to October 2022 (FY 23) stood at 1.5 percent of GDP (Rs. 1.226 billion) as compared to 0.9 percent of GDP (Rs. 587 billion) last year. During July to October 2022, the primary balance posted a surplus of Rs. 136 billion (0.2% of GDP) against the surplus of Rs. 206 billion (0.3% of GDP) last year.
In view of the prevalent sorry state of affairs, it is feared that the deteriorating trend will persist unless the government comes up with a serious reform agenda that can help to find a long-term sustainable solution for revival and survival of the economy. In this regard, resumption of IMF programme and completion of outstanding tasks is a critical factor. The Finance Minister of Pakistan claims to be committed to bringing the IMF’s EFF programme back on track. However, it appears, he is looking forward to an emphatic/positive response from IMF towards the fiscal needs of Pakistan as it is struggling hard to cope up with the aftereffects of 2022 disastrous floods.
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Dr. Ikramul Haq, Advocate Supreme Court and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions with Huzaima Bukhari.