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EDITORIAL: The current account deficit for the first 11 months of the current year has risen to 15.2 billion dollars which is unfairly being measured against the 20 billion dollars inherited by the Khan administration for two reasons.

First, the average international price of crude in 2018 was 65.32 dollars per barrel, declined to 56.90 dollars per barrel in 2019, reduced further to 39.68 dollars per barrel in 2020, rose to 68.17 dollars in 2021 and registered 117.37 dollars per barrel price on 28 June 2022.

Petroleum and products account for a significant quantum of our total imports and it is relevant to note that during July-May 2021 the government imported 8.523 billion dollars worth of fuel, including petroleum and products, LNG/gas, which doubled to 15.85 billion dollars in the comparable period of the outgoing year.

And what is further disturbing about the import figure for 2021-22 is the fact that like other countries around the world struggling to cope with the high price of fuel subsequent to the Russia-Ukraine war Pakistan has imported less than what is required which is being cited as the primary reason for the ongoing massive power load-shedding. This in turn has placed an untenable pressure on our dwindling foreign exchange reserves.

And second, the rupee-dollar parity in 2018 was on average around 139 rupees while today the interbank rate is a little over 206 rupees though this is likely to come down as and when the International Monetary Fund (IMF) board approves the seventh and eighth tranche release under the 6 billion dollars ongoing Extended Fund Facility programme. Thus a lower rupee value without doubt raises the cost of imports in rupee terms.

However, in this context it is relevant to note that the real effective exchange rate (REER) in 2018 as per the State Bank of Pakistan website was around 107.48, which subsequent to implementing the Fund’s conditions declined to 90.9 in 2019; and after the onslaught of the pandemic that led to expansionary monetary and fiscal policies the REER rose to 93 in 2020 and the provisional May 2022 figure is cited as 93.56.

While the SBP is insistent that contrary to past practice any deviation from 100 cannot be used as a yardstick for determining the amount of under or overvalue rupee rate, and having consistently failed to come up with a study to provide even a ballpark figure, one is forced to conclude that the rupee’s undervaluation in comparison to previous years, as well as the high discount rate of 13.75 percent, are policy measures designed to reduce the extremely concerning trade imbalance though without much success. This has implied a rate of domestic inflation that would surely have pushed thousands of households below the poverty line and undermines the purchasing power of the 6 trillion rupees, a historic high, collected by the Federal Board of Revenue in 2021-22.

Pakistan has forever struggled with a cyclical unsustainable current account deficit with economists arguing that a high growth year, the previous administration has been gloating about the 6 percent growth rate in 2021-22, is invariably on the back of higher capital imports (that also generate the bulk of FBR revenue). This is evident from SBP data as machinery imports rose from 73.5 million dollars July-May 2021 to 88.6 million dollars in the comparable period of 2022; however, the bulk of the rise was for textile machinery imports that doubled though the rise in value of imports was not in synch with volume of imports given the rise in international prices and the eroding rupee value.

However for growth to reach the budgeted target of 4.9 percent in 2022-23 is highly unlikely given that the Fund’s Memorandum of Economic and Financial Policies (MEFP) is expected to contain highly contractionary policies (including high discount rate, high taxes) which would reduce the current account deficit through a reduction in output.

We would have to wait for the MEFP to be uploaded on the Fund’s website, the usual practice being after the Board approval of the tranche release, before knowing precisely how much of the contractionary policies have been agreed by the Shehbaz Sharif-led government unless of course the federal government takes the initiative and uploads it on its website. That has never been done by any administration before in all of the 23 IMF programmes that Pakistan has been on, however, a finance minister has never tweeted that the MEFP has been received before either.

Copyright Business Recorder, 2022

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