Pakistan has got itself fully trapped in a catch-22 situation, which is an impossible predicament where you are prevented from doing one thing until you have done another thing, that you cannot do until you have done the first thing. Pakistan is under compulsion to reduce economic growth by curbing imports in order to save forex reserves to make repayments against foreign debt.
Both are crucial and the country is stuck between the two. If you liberate imports to achieve growth you risk a sovereign default and if you save forex reserves you undermine growth.
“Import suppression in Pakistan is inflicting shortages of goods and plant closures, undermining economic activity and revenue collection”. Esther Perez Ruiz, International Monetary Fund (IMF) Resident Representative in Pakistan, has been quoted by media as saying. Whereas, in the same breath, Finance Minister Ishaq Dar is reported to have stated that his choice is restricted to curbing imports for saving foreign exchange reserves and timely repayments against foreign debt.
Pakistan’s imports are reported to have declined by 28.44 percent during the first ten months (July-April) of the current fiscal year 2022-23 - from $ 65.519 billion last year to $ 46.887 billion during the current year. The country’s exports during July-April (2022-23) have been recorded at $ 23.174 billion against $ 26.247 billion in July-April of 2021-22, showing a decline of 11.71 percent. The Large Scale Manufacturing Industry (LSMI) output declined by 8.11 percent during July-March 2022-23 year-on-year.
The Finance Ministry, in its monthly economic update, has noted that the Federal Board of Revenue (FBR) tax collection increased by 16.1 percent during July-April (2022-23); however, it remained less than the target. The slowdown in economic activity mainly caused by import restrictions is a major reason behind a significant lower-than-expected tax revenue collection during the review period. The ministry further stated that collection from customs duty declined by five percent primarily due to a decline in imports due to the import compression policy.
The Ministry of Finance’s monthly economic outlook stated that inflationary pressures continued in May and inflation may remain in the range of 34-36% with tough economic conditions.
The report stated that downside risks pertaining to supply disruptions, inflationary pressures, synchronized policies, and high base effects continued to prevail, which would have an impact on the LSM output in the coming months.
The government reported that in the outgoing fiscal year, the economy grew 0.3%. The sluggish growth is attributed to curbs on imports that led to the closure of factories and shortage of goods.
Speaking to a delegation of the business community early this week, the finance minister defended his decision to reduce imports, which not only grounded the economy but also contributed to high inflation. “The choice was to keep oversight over imports to save foreign exchange and make timely payment of foreign debt,” stated the finance minister. He is reported to have reiterated that the country would not default. “Our sovereign payments are being made on time,” the minister said, adding that Pakistan would escape the crisis.
Pakistan, having ignored reforms, fiscal discipline and good governance for years, is primarily responsible for the current situation. But the IMF, too, cannot be absolved of its crime of making a meaningful contribution to Pakistan’s current economic slide. The conditionalities set by the IMF had left no space for economic growth, so to speak. Import suppression, which has adversely impacted raw material supply chains, is one of the factors responsible for woefully low rate of growth for a developing country like Pakistan.
There are many other factors that have influenced negative growth. Withdrawal of subsidies invoked unprecedented hikes in administered prices such petroleum products, gas and electricity tariffs.
High interest rates of over 21 % and the rupee slide have made it worse. All this made our products uncompetitive for exports and beyond reach of many in the domestic market. The inflation shrunk the consumer base and shook the investor’s confidence.
The catch-22 situation is likely to prevail in years to come as well as the debt repayment obligations are not going to get any better anytime soon. In fact, with growing interests on loans and a downward trend in revenue generation, the challenges would only become more formidable.
Political stability, restoration of consumer’s and investor’s confidence, fiscal competence and discipline, lenders’ confidence, notably of IMF’s, may somewhat ease the situation and may get our economy and fiscal position back on the rails, leading to a visible improvement in trend. The most critical and challenging task is to attain competence in our governance structure and create political stability and harmony in the prevailing charged environment.
Copyright Business Recorder, 2023