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A number of factors have come together leading to greater uncertainty on the economic front. This level of uncertainty about the short-run and medium-run prospects of the economy of Pakistan has seldom been felt before.

The first uncertainty relates to the persistence of Covid-19. The country is in the grips of effectively the fourth attack with the spread this time of the more dangerous Delta-variant. The incidence in persons tested is above 7 percent and on average the casualties are approaching one hundred daily.

Selective and 'smart' lockdowns have been imposed especially in large cities. Also, the rate of vaccination is being accelerated. However, the number of adults fully vaccinated stands at 18.5 million as of the 3rd of September 2021. This effectively amounts to a coverage of 8 percent. At this rate it is unlikely that more than 40 percent of the population will be covered by end December.

The uncertainty relates to whether the fourth attack is the terminal attack or by when full herd immunity will be developed. Meanwhile, the spread of lockdowns and tougher standard operating procedures will imply a negative impact on various economic activities.

The second uncertainty relates to developments in Afghanistan. There has been an orderly transition of power to the Taliban, but questions remain as to whether this will lead to a truly representative government and economic stability. Until now there has no pressure from Afghan refugees trying to enter Pakistan.

However, the economic situation of Afghanistan is very fragile. Already, supply shortages are emerging of basic necessities. The Kabul administration will increasingly face a shortage of funds as earlier over 80 percent of the cost of public services was financed by external sources, especially the USA. If living conditions drastically worsen then the pressure to migrate to neighboring countries, especially to Pakistan could greatly increase. Pakistan may come under pressure from the international community to accommodate the refugees.

The other area of concern is international trade of Afghanistan, especially financing of imports. The dollar reserves have largely been confiscated by the USA. Therefore, import financing will be increasingly difficult. This will impact the almost $1 billion of imports from Pakistan. In addition, the volume of transit trade to Afghanistan via Pakistan by countries like China and India could be reduced. This will, of course, have a negative impact on the informal service economy of Khyber Pakhtunkhwa.

Further, there is the risk of more terrorist threats in Pakistan. The TTP still has sanctuary in Afghanistan. Already, the incidence has increased in the last few months. The new development is the targeting of Chinese workers in Pakistan and CPEC projects. This could lead to a slowdown in these projects.

Turning more to factors relating directly to the economy, the big question mark is the future of the IMF Program. The Finance Minister has taken an aggressive stance with respect to implementation of reforms and actions like the escalation in power and gas tariffs, higher personal income tax and other taxes like the Petroleum Levy. Now there are some objections of the IMF to the launching of the subsidized Kamyab Pakistan credit program. Also, there is much greater concern about the size of the current account deficit in 2021-22 which could now significantly exceed 3 percent of the GDP. This could lead to greater pressure from the IMF for stronger measures on the interest rate and exchange rate fronts.

The sixth review of the IMF program is expected this month. This review is likely to be more problematic due to lack of implementation of some prior actions and structural benchmarks. The Finance Minister has indicated that Pakistan is committed to staying in the Program. Therefore, the question is how much flexibility will be shown in the negotiations. Has the Government prepared a fallback strategy if the negotiations flounder?

The fourth source of uncertainty relates to the behaviour of opposition parties, especially the PDM. After the Karachi large public gathering the PDM appears to be in a more aggressive mood and has threatened to make a 'long march' to Islamabad in coming months. If this happens, then there will be some dislocation of economic activity.

The high and rising level of uncertainty is beginning to manifest itself in the short-run economic developments. First, the stock market has displayed no direction since May 2021. The KSE-100 index has remained in a narrow range. One day the index rises, the next day it falls. Fortunately, there has been no major exit of foreign funds from the market.

Second, foreign direct investment continues to decline. It fell by 29 percent in 2020-21 and by over 30 percent in July 2021. The outflow of profits has jumped up by 115 percent in July 2021. This indicates that foreign companies in Pakistan may be remitting their reserves in face of high perception of risk, especially regarding the future value of the rupee.

The declining value of the rupee is, in fact, the third major factor reflecting higher economic uncertainty. Despite exceptionally foreign exchange reserves with the SBP the rupee has plummeted by over Rs 167 per US dollar since the end of June 21. The SBP has preferred not to intervene in the market to stop the fall in the rupee.

The fourth indicator of uncertainty is the development in the market for PIBs. No bids have been received for long-term bonds in the three flotations since May 21. The yield on 3-year bonds has shown a gentle rising trend.

Overall, the economy is beginning to flounder in the face of greater insecurity on the economy. The next few weeks are crucial in terms of developments in Afghanistan and the outcome in the sixth review by the IMF. Also, will the Covid-19 attack subside sufficiently?

We hope and pray for stability and improvement in economic conditions in our country.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister

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