Though the economic situation is going from bad to worse yet something encouraging has also come to fore that may augur well for its future prospects. In this context it is reported that Pakistan’s current account recorded a surplus in March, the highest in two years following stringent import restrictions to manage the economy’s turmoil.
The State Bank of Pakistan (SBP) said the current account posted a $654 million surplus against a deficit of $36 million the previous month. Helped by the strict import ban, the current Account Deficit (CAD) contracted to $3.4 billion in July-March of the current fiscal year and it stood at $13 billion for the same period last year.
It is important to note that Pakistan imposed the import ban on luxury products and non-essential raw materials last year to avert a balance of payment crisis as foreign exchange reserves shrank and are barely enough to cover a month of controlled imports. However, the restrictions on raw materials hit manufacturing, including of cars and cell phones, forcing some plant closures.
It is widely acknowledged that Pakistan’s economy has been in crisis for a large part of its existence but a stage has now been reached where personal, party and institutional interests and differences are required to be restrained and all stakeholders need to agree to some basic principles and policies.
The economic situation is at the end of its tether and, despite loud assurances of the official economic managers, the agreement with IMF appears nowhere near and that is certainly a deep cause of worry.
Apparently, the hitch now is about the demand of the IMF asking for obtaining the necessary financing assurances as soon as possible to pave the way for the successful completion of the 9th EFF (Extended Fund Facility) review. The IMF had identified the $6 billion hole in Pakistan’s external financing requirement that it asked to be bridged before the matter was taken to the IMF’s board for approval of the next loan tranche. Pakistan may take some time to arrange the rest of the loans. The government has mentioned the loans from foreign commercial banks as one of the sources to bridge the gap. It was reported that it will take four to six weeks in negotiations till a stage is reached for the foreign commercial loans to be disbursed.
It was also mentioned that if the foreign commercial banks just give an assurance to the IMF, it will be sufficient to strike a deal. The problem however is that the foreign banks are reluctant to extend any fresh financing due to the junk credit rating of Pakistan. Pakistani economic managers have also pinned their hopes on the $450 million project proceeds from the Geneva pledges and expect to receive over half a billion dollars from the outsourcing of the three international airports though the two avenues that Pakistan may not tap immediately.
The official clarification from the IMF dampened hopes of an earlier signature of the agreement though apparently confirming and welcoming financial commitments given by the UAE and Saudi it pointed out that these commitments are short of the requirements of Pakistan. Pakistan requires substantial financing to bridge the financing gap and Pakistani economic managers have asked the World Bank and the Asian Infrastructure Investment Bank to provide $900 million loans. The problem in this respect is that Pakistan has not met all the conditions set by the World Bank. Moreover, the World Bank was also looking towards the IMF before approving any new budget support loan. The consistent demands and insistence on their fulfillment indicate that IMF still harbour some issues with Pakistan’s economic policies and priorities. IMF has brought on record that there is an agreement with Pakistani economic managers on the need to maintain strong policies and secure sufficient financing to support the authorities’ implementation efforts.
The IMF had demanded an increase in the interest rates by at least 6% when the key policy rate was 17%. The State Bank has already raised the rate to 21% during the last two months but it is still short of the IMF’s requirement of having the inflation-adjusted positive interest rates. For the next fiscal year 2023-24, the IMF has projected 21.9% average headline inflation rate and the current real policy rate is still negative. It is also reported that the trust deficit between Pakistan and the IMF has widened and it is difficult to see if it would be brought to normalcy particularly in wake of the coalition government has made public their plan to provide Rs.50 per liter petrol subsidy for motorcyclists and small car owners of up to 800cc.
It is very obvious that the financial decline of Pakistan was rapid clearly bringing to fore the fault lines in the economic structure that have started to burst open causing the current fiasco. It is imperative to take into account that foreign exchange reserves held by the State Bank of Pakistan dipped to $2.9 billion in February 2023 from a peak of $20.1 billion in August 2021. This is a substantial fall indicating the presence of fatal leakage that the Pakistani economic managers either could not detect or were not allowed to. It is not possible in today’s technologically superior account management techniques such massive leakages remain undetected. It was clear that such low levels of foreign exchange reserves raised alarm bells as investors and currency speculators feared imminent risk of an economic default and one imminent problem that emerged there from was horrible depreciation of Pakistani currency.
In this context IMF has been consistently pointing out that the root of any economic crisis in Pakistan is the inability of the government to meet its external debt obligations and this issue is directly related the trade disequilibrium the country is always subjected to. Pakistan’s current account reflecting net trade in goods and services and is an important component of the balance of payments has consistently recorded large deficits over the years. The result of this lack of balance is that last year the current account deficit was at $17.4 billion with imports outpacing exports by approximately $45 billion, with remittances, valued at $31.3 billion, softening the blow.
The inference could be easily drawn that the current economic crisis is this trade deficit as exports are worth only 45 per cent of imports. There are multiple factors that cause this imbalance primarily lack of efficiency across different markets such as labour and capital markets. These inefficiencies imply that Pakistani producers are unable to productively compete with foreign producers, particularly those located in the neighbouring Asian region. A major reason for Pakistan performing below its peers is the inability of Pakistani businesses to tap into the trade potential offered by its partners.
It is widely known that the cost of doing business is exorbitantly high accompanied by unpredictability of economic environment in the country owing to high level of government interference. It is also reported that higher levels of tariffs imposed on Pakistani goods as well as the tariffs imposed by Pakistan on imports limit participation of Pakistani firms in international trading activities.
It is important therefore that these structural difficulties are removed so that the economy starts to properly perform.
Asrar Raouf is a former civil servant
