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It doesn’t make for a pretty picture. Galloping inflation, a yawning trade deficit, depreciating currency and underperforming growth. Add high rates of unemployment, a crippling circular debt and high import bill and you can understand why officials of the finance ministry are looking for a miracle. But Santa was just not bothered this year.

Pakistan’s 2021 in economic terms was better than its 2020 but that is like saying a stroke is better than a heart-attack. 2020 ravaged economies across the world. Even China, the economic success story of the 21st century, had a few quarters of relatively slow growth.

But a V-shaped growth was expected in 2021 and for many countries it did take place. The stress on global supply chains and ever increasing oil prices are indicative that businesses picked up the slack and demand continues to be high. Pakistan’s economic growth was negative 0.5% in 2020, and seeing the writing on the wall the IMF projected a miserly growth rate of 1.5% for 2021 even though the State Bank of Pakistan (SBP) had put forth its rate of growth at 3%.

The IMF was wrong. Global demand for goods and a weak rupee pushed exports high. Indeed, 2021 has been a good year for Pakistani goods. Pakistan’s exports at the height of Covid-19 were $1.26 billion for the month of May 2020. The exports’ value in June 2021 was more than double of that at $2.5 bn. Exports had been doing well all year till that point and the indicators were looking better than expected. The exchange rate which was PKR 160.5 on January 1, 2021 was whittled down on PKR 152.1 on May 14.

Shortly after, the International Monetary Fund (IMF) revised its earlier gloomy prediction and revised projected GDP growth to 3.9%.

Pakistan’s booming exports and a better-than-expected agricultural output meant that the pessimistic outlook at the beginning of the year no longer held true.

In its World Economic Outlook report 2021 the IMF stated, “Projections are revised up for the Middle East and Central Asia due to robust activity in some countries (such as …Pakistan)”. The 3.9% growth was less than the 6% growth projected in 2021 for the global economy as a whole but it was a massive improvement from 1.5% stated earlier. On July 27, the SBP put out its forecast of the GDP growth to rise from 3.9% in FY21 to 4-5% this year, and average inflation to moderate to 7-9% from its recent higher out-turns. It seemed Pakistan had turned a corner. But there was trouble looming on the horizon.

As exports increased, so did Pakistan’s imports. This is the continuing tragedy of the Pakistan industry which has not been able to manage import substitution in 70 years.

As demand for steel, oil, and other industrial raw materials went up, so did the import bill and with it came pressure on the local currency. Around this time commodity prices starting going up including that of imported food items. Oil prices have been increasing due to rising demand and in spite of firm signaling by the US, the OPEC has not increased its production of oil, significantly forcing the country to dip into its own reserves.

Unfortunately, Pakistan has no similar facilities and had to import expensive oil and related energy products putting its currency under immense strain.

Since May 13 2021, the rupee has continuously shed its value as the demand for dollars out paces it, thus making imports even more expensive. December has been particularly brutal with new lows every few days and currently standing at PKR 178.5 to the US dollar.

Talk of new records being set in exports is doing the rounds with the finance ministry and the PTI government’s economic team proudly bringing them up in their public and media interactions. “We are glad to inform that Pakistan’s exports during November 2021 increased by 33 percent to a historic monthly high of $2.903 billion as compared to $2.174 billion during the corresponding period last year. Our target for the month was $2.6 billion,” Abdul Razak Dawood adviser to the Prime Minister on Commerce said in a tweet on December 1, 2021. He also stated that the cumulative exports in the first five months from July to November 2021 were $12.365 billion, a big increase from the $9.747 billion recorded in same period of the last fiscal year which showed a growth of 27%.

The trouble was that the import bill was even higher. In November, the trade deficit grew by 162.4%, largely due to imports being three times compared to exports from the country. The trend started in June and the deficit has been growing since then with actual deficit in November being $5.107bn compared to $1.946bn in the same month last year. The import bill itself reached an all-time high of $8.01bn from $4.12bn over the corresponding month of 2020, an increase of 94.41%.

The country was trapped in a vicious circle. Although remittances have also been growing at high pace between industrial and nonindustrial imports and national debt servicing, the demand for dollars has far outstripped supply leading to a worsening deficit. Macroeconomic figures are gloomy with inflation at nearly 11%, although many say that real inflation is much higher. The Consumer Price Index (CPI) shows a constant increase from 5% in January 2021 and eventually getting to an eye-watering 20-month peak of 11.5% in November 2021.

The Wholesale Price Index (WPI), which monitors prices in the wholesale markets across Pakistan, saw a massive increase of 27% in November 2021 while the Sensitive Price Index (SPI), which monitors prices of 51 essential commodities also shows an average increase of 19.43% on an annual basis. Food, fuel, transport, medicine, consumer goods, and other basic necessities are fast becoming out of reach of the common man and although the government has stated that it is being vigilant on price increase, the reality on the ground says otherwise. The SBP raised interest rates a few weeks ago in the hope that it will curb inflation - one hopes that it alleviates the situation.

Pakistan’s economy has slipped into a state of stagflation and unless something is done on the policy side, 2022 will turn out to be as difficult as 2021. The one ray of hope is the growth of technology and startup companies which attracted over $300 million in FDI and is expected to increase this amount significantly in 2022. But more needs to be done on the policy side if Pakistan is to climb out of its economic quagmire.

The article does not necessarily reflect the opinion of Business Recorder or its owners

Salahuddin Ghaznavi

The writer is a Chartered Accountant, and currently Managing Director of a cross-border money transmission FinTech in the GCC.


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Ali Chandio Dec 31, 2021 12:02am
A well summarised analysis of how we reached into this current economic crisis.
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