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The year, 2021, has just come to an end. The first part of the year saw a process of recovery from the downturn resulting from the spread of COVID-19. The economy achieved a growth rate in 2020-21 of 4 percent. This was facilitated by bumper crops of wheat, rice, sugarcane and maize. The large-scale manufacturing sector also performed well with a 15 percent growth rate.

The current account deficit of the balance of payments came down to the extraordinarily low level of 0.6 percent of the GDP due primarily due to low import prices. The budget deficit remained close to the targeted level of 7 percent of the GDP, partly due to some buoyancy in FBR revenues, which showed a growth rate of 19 percent.

The weak area in the performance of the economy remained the rate of inflation. The average rate of inflation in the last quarter of 2020-21 approached a double-digit rate of almost 11 percent, while food prices grew at an even faster rate. The higher rate of inflation was attributable to expansionary monetary and fiscal policies, supply shortages, market distortions and the beginnings of the upsurge in international commodity prices.

The first six months of 2021-22 started with a high level of optimism about prospects for the economy. The expectation was that the economy was ready to reach the growth rate of 5 percent after a long gap of four years. Given the stabilization of the economy, as indicated by the very low current account deficit, the stage was set for even more expansionary fiscal policy.

The Federal Budget, that was announced in early June, was visibly expansionary in character. The level of development spending by the Federal and Provincial Governments was targeted to increase in 2021-22 by as much as 62 percent. However, the deficit was expected to remain relatively low due to fast growth in FBR revenues of 22 percent and in non-tax revenues of 41 percent.

This initial optimism waned by October 2021. The primary reason is the colossal increase in the current account deficit due to an unprecedented jump of over 60 percent in international commodity prices with the fast pace of recovery of the global economy and the hangover effect of the unbridled monetary expansion especially by the US, to reduce the negative impact of Covid-19.

The current account deficit rose to $5.4 billion by October 2021. The month of November saw an even larger monthly deficit and the annual projected level now is almost 5.5 percent of the GDP. Clearly, this is unsustainable as the external financing requirement could rise to as much as $30 billion, which would be very difficult to arrange even in the presence of the IMF program.

Consequently, in recent months the SBP has tightened the monetary policy and raised the policy rate by 2.75 percentage points. The rupee has depreciated by over 12 percent in the first half of 2021-22. The 30th of December saw a mini budget with a target of additional tax revenues of Rs 350 billion, with higher sales tax especially on imported goods.

What are the prospects for the second half of the financial year, 2021-22, and the first half of the calendar year, 2022? This hinges crucially on short-term trends in the global economy. There was the expectation that the growth rate would come down once again following the recent rapid spread of the mutant, Omicron. However, it now appears that while large numbers of people have been affected the impact on health is relatively limited in nature.

There was also the projection that along with a slow down, global prices of commodities will start falling from the peaks attained in 2021. The first indication of this was in the global oil price. It fell from a peak of $85 per barrel in mid-October to $70 by the first week of December. But it has started rising again and is now approaching $80. Prices of other commodities have generally remained stable.

The likelihood now is that at best there will be a small decline in international commodity prices. As such, there will be need for continued emphasis on managing the current account deficit. If the SBP projection of 4 percent of the GDP is to be achieved, the monthly deficit from January to June 2022 will need to be limited to almost half the level of July to December 2021 period.

Following the resumption of the IMF Programme which seems likely now, it is fair to expect that the rupee will strengthen. However, this may exert pressure on imports and lead to a rise in the trade deficit. The SBP may be compelled to use other instruments of monetary policy.

The rate of inflation in coming months will hinge crucially on the movement in international commodity prices and the rate of depreciation of the rupee. In addition, the mini-budget will have some impact on domestic prices. Further, the electricity and gas tariffs will be rising, and the rate of the petroleum levy will be revised upwards by Rs 4 per litre every month till it rises to Rs 30.

Overall, there does not appear to be the likelihood that the rate of inflation in the CPI will come down to below the rate of 12.3 percent attained in the month of December 2021. Double-digit inflation is likely to persist.

Turning to the growth prospects in the second half of 2021-22, they appear less promising than in the first half. First, the Rabi crop outcomes, especially of wheat, are likely to be worse because of the shortage and higher prices of fertilizer. Second, the gas loadshedding is likely to have a big impact on industrial production, especially since December and January are generally the seasonal peak months of the QIM. Third, the rise in interest rates is likely to affect the level of private investment. It is unlikely that the economy will grow at a rate significantly above 3.5 percent in the first half of 2022.

The second half of 2022 may see some decline in international commodity prices due to the recovery of the world economy and elimination of supply shortages. This should restrain the level of imports and help in containment of the trade deficit.

However, if the IMF program continues as envisaged then the budget for 2022-23 will have to be framed in line with the targets agreed in the program. The first indications are that the IMF will expect Pakistan to generate a primary surplus. This will imply limiting the budget deficit to significantly below 6 percent of the GDP. Inevitably, this will constrain the Federal Government from resorting to an expansionary fiscal policy.

The big question which will remain unanswered is what will be the nature of relationship of Pakistan with the IMF after September 2022? The year, 2022-23, is the last full financial year of the incumbent government. Historically, the tendency is for governments to go for very expansionary policies in the last year of their tenure, as in 2017-18. This will be constrained in the presence of a Fund program.

The problem is that external financing requirements will continue to be large, even with a smaller current deficit. The minimum level is likely to be $25 billion, due to the increase in the level of external debt repayments. The likelihood of this level of financing being arranged is not very high in the absence of another IMF programme after September 2022.

The big imponderable currently is the worsening of the humanitarian situation in Afghanistan and its impact on Pakistan. There could be pressure of refugees, smuggling and increase in terrorism activities.

The year, 2022, promises to be an eventful year on the international and domestic fronts. We hope and pray that the rate of economic progress will generally improve, especially in the second half of the year.

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

Copyright Business Recorder, 2022

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister

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