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Pakistan finds itself increasingly in a quagmire. The economy was hit severely first after March 2020 by the pandemic, Covid-19, which led to a big loss of lives and livelihoods. The process of recovery got underway in 2021, but from June 2021 onwards there has been a big jump in international commodity prices. The onset of the Russia-Ukraine war has added further to the inflation globally in oil, food and other prices. The crude oil price reached a peak of $130 per barrel in early March 2022.

The consequent pressure on the level of imports has fundamentally altered the current account position of the balance of payments. It was only marginally in deficit of $1.8 billion in 2020-21. However, since then it has averaged a deficit $1.5 billion per month and cumulatively by the end of February 2022 the deficit has piled up to $12 billion. The likelihood is that it will approach $18 billion in 2021-22. This is equivalent to almost 6 percent of the GDP and is substantially higher than the SBP projection for the year of 4 percent of the GDP.

This has inevitably led to pressure on the foreign exchange reserves. Fortunately, Pakistan received $2.8 billion from the IMF in the form of the additional SDR quota in August 2021. Consequently, reserves rose to a peak of $20 billion, providing for a healthy import cover of over three months.

Thereafter, there was the receipt of $3 billion loan from Saudi Arabia in early December 2021, followed by a loan installment of $1 billion from the IMF after completion of the sixth review in February 2022 and $1 billion from the flotation of Sukuk bonds.

Normally, the expectation would have been that such large lumpy inflows would have kept the reserves at a health level. But the bad news is that the opposite has happened. During the second week of March, they fell over $300 million in one week. Now, last Thursday we were informed that reserves have fallen in one week by $2.9 billion, due largely to a big debt repayment. Consequently, as of March 24th, foreign exchange reserves have crashed to the perilously low level of below $13 billion, not even enough to provide import cover for two months. With continuity of a fragile current account how much further decline in reserves are we likely to see in coming weeks?

The rupee has inevitable been weakened by negative market perceptions and a likely passive attitude of the SBP in the absence of a big cushion of reserves. The rupee has fallen to below Rs184 per $, equivalent to a decline of 16 percent. Of course, the uncertainty on the economic front has been added to by the rapid political developments with regard to the non-confidence motion.

The increasingly precarious position of the Pakistan’s economy is beginning to receive more mention in international reports and media. The recent report by UNCTAD has singled out five countries as most vulnerable extremely due to the effects of the Russia-Ukraine war on global supplies and prices. These five countries include Pakistan.

The report last Thursday by Moody’s has clearly highlighted Pakistan’s increasingly difficult financial position due to the combined effect of economic and political developments. It has implied that Pakistan’s credit rating may be lowered from B– a to C. The C category includes countries which are having difficulty in meeting their external payment obligations, including the payment for imports.

The return of higher inflation in developed countries due particularly to expansionary fiscal and monetary policies implemented after Covid-19 has also raised the prospect of higher interest rates globally. The Federal Reserve of the USA has embarked on a step-by-step policy of raising interest rates.

Meanwhile, Pakistan has seen a big jump in the effective yield of sovereign ten-year bonds to almost 13 percent. Both this yield and the SBP policy rate could rise significantly in coming weeks. This will add to the cost of both domestic and external borrowing and put more pressure on the Federal budget.

There is also bad news on the size of the wheat crop. It is likely to below by almost 1.5 million tons in comparison to last year’s output. With the inevitable increase in the demand, the likelihood is that imports of over 5 million tons will be required in 2021-22. The price is likely to be almost twice the price paid for import last year. Inclusive of higher value of imports of petroleum products, edible oil, the import bill from March to June could be over $8 billion more than the level in the corresponding period of 2021.

The relief package announced by the Prime Minister with a Rs 10 per litre reduction in price of HSD oil and motor spirit and a Rs 5 cut in the electricity tariff is likely to magnify the circular debt problem in the power sector and create a circular debt situation for the Oil Marketing Companies. We could also witness the beginning of a circular debt problem with the State Life Insurance Corporation due to large payments against health insurance.

Finally, there is the growing uncertainty about the future of the IMF programme, at a time when it is most needed. Any suspension or termination will reduce the quantum of inflow and raise further the cost of external borrowing. Reserves could fall further in coming weeks. Pakistan may begin to see a slide of the rupee close to that being witnessed with the Sri Lanka Rupee. This is the most critical time for the newly autonomous SBP to demonstrate its full institutional capability and prevent runaway inflation.

(The writer is Professor Emeritus in 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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