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Elections will hopefully be held in the next two weeks. They are taking place at a time when the economy continues to be characterized by severe stagflation. The rate of inflation in the CPI was 29.7% in December 2023 and the average for the first six months of 2023-24 is 28.8%. The Sensitive Price Index showed an increase of 44.2% in the week ending on the 11th of January 2024.

The Quantum Index of Manufacturing has shown a decline of 0.8% in the first five months of 2023-24. The first time estimate of quarterly GDP growth in the first quarter of 2023-24 is of only 2.1%, despite the low base effect of the disastrous floods last year, leading to a 5% growth in the agricultural sector. The industrial and services sectors have shown low growth rates of 2.5% and 0.8%, respectively.

The position with regard to the balance of payments position is somewhat better. The current account deficit has been restricted to only $1 billion in the first six months of 2023-24. This represents a decline of almost 73% in relation to the level in the corresponding period of last year.

The improvement is due primarily to the almost 15% decline in imports of goods. Exports have shown limited growth of 7% while home remittances have actually declined by 7%. Foreign exchange reserves of the SBP were $8.2 billion at the end of December 2023. They have been augmented recently by $0.7 billion in the form of the second installment of the IMF loan. However, the import cover provided by the reserves is inadequate to finance requirements for two months.

There is need to emphasize that the fall in imports has occurred at a time when there has been limited depreciation in the value of the rupee. The real effective exchange rate of the rupee has increased by 13% from July to December 2023 which should have increased imports. It is clear that physical import restrictions by the SBP have continued since last year. A first estimate of the reduction in the value of imports from July to December 2023 due to the restrictions is $3 billion. Therefore, in the absence of these restrictions the current account deficit could have approached $4 billion.

The import restrictions have reduced output in some industries like automobiles, electrical equipment, steel, etc. They have also implied higher rates of inflation in imported consumer goods like wheat, tea, spices, and pharmaceuticals. Despite the commitment to the IMF a market-determined exchange rate policy has been abandoned. The IMF appears to have shown pragmatism in accepting the import regulations.

Therefore, the initial economic conditions for the successor government after the elections will be characterized by very high rate of inflation and low buoyancy in the real economy. The second review of the SBF of the IMF is due in March on the end-December performance criteria.

This review may run into problems due to the failure in some performance criteria like the change in the level of circular debt in the energy sector, borrowing by the SOEs and of the primary deficit in the consolidated budgetary position of the federal and provincial governments combined. This facility will anyway come to an end in April 2024.

The extremely crucial decision is whether the new government opts for entering into an IMF programme, probably in the form of an Extended Fund Facility for three years. This will be essential if the credit worthiness of Pakistan is to be preserved and arrangements made for external financing of up to $24 billion annually.

The likelihood is that if Pakistan goes for a new IMF programme, the conditionalities and reforms required will be even tougher, more broad-based and structural in nature than in the previous programs. This will be essential to ensure that Pakistan’s economy becomes less vulnerable and foreign exchange reserves rise to above the minimum import cover of three months during the tenure of the Programme.

Therefore, the last quarter of 2023-24 and 2024-25 will need to be characterized by strong policy moves and reforms by the elected government. For example, the federal and provincial budgets of 2024-25 will need to build a budget deficit reduction and primary surplus increase of at least 1% of the GDP.

The circular debt of the power and gas sectors combined has continued to show exponential growth despite large tariff adjustments. It now stands at the all-time high of Rs 5.7 trillion. As such, periodic further big escalations in tariffs will continue in 2024-25.

The outlook for monetary policy also looks grim in coming months. The policy rate of 22% could adjust marginally downwards if there is a significant drop in the rate of inflation. The new programme with the IMF may require the adoption of a more market-oriented exchange rate policy and withdrawal of import controls.

Given the mix of tough fiscal and monetary policies in 2024-25, a set of macroeconomic projections have been made for 2023-24 and 2024-25. The 57 equation BNU Macroeconomic Model has been used for making these projections, which are presented in the table.

Therefore, the newly-elected government in its first year will face daunting challenges. It will have to show the highest quality of economic management to reduce the external financial vulnerability of Pakistan at a time when the people will continue to face stagflation with rising unemployment and poverty.

=====================================================================
                                  Table
                      Macroeconomic Projections for
                          2023-24 and 2024-25
=====================================================================
Variable                     Unit                2023-24      2024-25
=====================================================================
GDP Growth Rate              %                    2.7             2.5
Total Investment             % of GDP            11.5            11.3
Rate of Inflation            %                   26.0            20.2
Current Account Deficit      % of GDP            -1.0            -1.4
Budgetary Position           % of GDP            -7.6            -6.6
Revenues                     ”                   12.5            13.2
Expenditure                  ”                   20.1            19.8
Unemployment Rate            %                   10.0            11.0
Incidence of Poverty         %                   43.0            46.0
=====================================================================

Copyright Business Recorder, 2024

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister

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