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The trade data for the month of August has revealed continuing challenges to macroeconomic framework. It is shocking to note that the imports were up by a hefty rate of 21%, rising from $4.9 billion in July 2022 to $6 billion in August. We do derive comfort from higher exports of $2.5 billion compared to $2.3 in July, a growth of 11%. But our nemesis is imports and in the short term we cannot hope to accomplish a high growth in exports particularly when the world is bracing for recession, which would adversely affect export demand. In the short run, our survival is in cutting the demand for imports.

Those who would like to compare this level of imports to the same period of last year, and feel emboldened, would be complacent. Even last year, rising imports were ominous which eventually unraveled the economy. This year, we are rebuilding the economy and for this purpose have signed perhaps the toughest IMF (International Monetary Fund) programme ever. We had welcomed the trade data for July which paved the way for alleviating the turmoil in the forex market, which erupted in July. We are back to the same situation facing an unsustainable demand for imports. No matter how difficult it would be, for couple of years, we will have to live with a self-imposed constraint of limiting imports to our forex earnings comprising exports and remittances. Otherwise, we would face market turmoil and instability of the type we are confronting at the moment.

The inflation data has been unprecedented. Never in country’s history have so many unfavorable events staked together to wreak havoc on Pakistan’s economy. Covid-19, the Ukraine War, political instability and now floods, have all brought economic ills.

The CPI inflation for the month of August was 27.3%, highest in 45 years. It was the third consecutive month when inflation stayed above 20%, which is also unprecedented. The rural inflation was up 28.8% while urban was 26.2%. As in the previous three months, food inflation was the primary reason, which stood at 30.2% in rural areas and 28.8% in urban areas. The average inflation for two months Jul-Aug is 26.1% compared to 8.38% and 8.74% for 2021-22 and 2020-21, respectively. One can well imagine how deeply the inflationary pressure is affecting the people.

The core inflation (excluding food and energy) is also on the rise after a long containment in single digit since 2012. For the last three months it is in double digit and rising, with 11.5%, 12.0% and 13.8% in June, July and August, respectively, in urban areas and 13.6%, 14.6% and 16.5% for rural area.

That the price situation is systematically pointing to run-away inflation is reflected in two other indices. First, the sensitive price index (SPI) is depicting the rising and unprecedented price trend during the last 10 weeks, rising gradually from 32.01% on 30-6-2022 to 45.5% as on 1-9-2022. The SPI is a basket of kitchen items and some essential energy related item. Such high prices are breaking the back of the fixed income families whose wages and salaries are sticky.

Whether there is a chance for these prices to come down any time soon, we examine the last index, which is the wholesale price index (WPI), normally considered a harbinger of future retail prices. Inflation of this index has been in double digit since March 2021 and rising almost uninterrupted since then and clocking inflation of 41.2% in August. Thus it would be unrealistic to expect slowing down of inflation any time soon.

It is also important to note that this exceptional inflation would not come down until nearly June 2023, unless the high energy and food prices drop significantly, because the base effect of low inflation would continue to produce high readings of inflation. The reduction of international oil prices to $70/barrel could herald a price retreat. This is possible but the recent action by OPEC+ cartel to cut the production has led to partial reversal of recent price gains. Furthermore, the flood situation would worsen the inflationary pressures because of supply shocks which are in the making.

While we are facing such challenges, the much expected stability after the release of an IMF tranche is sourly missing. It has taken just a few days after the release for the forex market to revert to its previous trend. On 6-9-2022, the interbank rate climbed back to Rs 221.48/$ almost at the level of Rs 222.23/$ it was on 29-8-22 the day when the tranche was approved by the Board. In the open market, against the rate of Rs 232/$ as on 29-8-2022, and after falling to Rs 219/$ on 1-9-2022 it rapidly climbed to even higher rate of 233/$ with Rs.10 gaining in a single day on 6-9-2022. It shows an unbelievable difference of Rs 11 between the interbank and open market.

We would like to reiterate what we argued in our last article titled “A drifting economy” (BR:1-9-2022) in response to a similar situation in the market: “….it was quite surprising that during this period there was no voice guiding public sentiments or explaining the causes behind such untoward activity in the market. The Acting Governor has spared no opportunity to underline the fundamental fact that Pakistan has lined up $36 billion financing against its needs of $32 billion, implying a reserves build-up of at least $4 billion at the close of the year. So where the need for continuing adjustment in the exchange rate is coming from? We believe there is no basis for exchange rate volatility and strong oversight on market practices should be exercised and speculative tendencies should be curbed to help stabilize the market.”

There are reports that FIA (Federal Investigation Agency) has rounded up few people who were involved in illegal dealings in foreign exchange. Such actions are imperative. We had alluded to such actions in our previous article as well. Without strict vigilance and monitoring there is an inherent tendency in the market behavior to seek unwarranted gains and engage in speculative activity. With the revival of the IMF programme and availability of required financing we see no reason why such large volatility is observed in the forex market. Also, prices have to be monitored also as has been done all along by the Ministry of Finance. There is no other agency which can bring all stakeholders together to ensure that prices are competitive and no economic rents are accruing to the sellers.

Copyright Business Recorder, 2022

Waqar Masood Khan

The writer is a former finance secretary, government of Pakistan

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