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The balance of payments (BoP) statistics released by the State Bank of Pakistan for the period July 2023 to January 2024 reveal a positive picture. Reserves have increased significantly from $4.6 billion at the start of 2023-24 to $8.3 billion as of end-January 2024. However, they are still relatively low and provide import cover for just over one-and-a-half months.

The surplus in the balance of payments in the seven months was $2.4 billion. In addition, the net inflow of $1.3 billion from the IMF, as part of the Stand-by facility, has contributed to the overall build-up in reserves of $3.7 billion.

A comparison with the balance of payments in the corresponding period of 2022-23 shows clearly the extent of improvement this year. During that period, foreign exchange reserves fell by over $7 billion, down to the perilous level of $3.2 billion. This was not even adequate to provide import cover for even one month and led subsequently to a drop in the value of the rupee of 7 % in the next five months.

There is need to determine clearly the reasons for the improvement in the balance of payments position. One of the major factors is the reduction in the value of imports of 11%, despite the fact that imports were already depressed last year.

Clearly, the SBP has continued the policy of physically restricting imports. This is demonstrated by the fact that the rupee has remained nominally stable. A big depression of 11% in imports would not have been possible without a large decline in the value of the rupee in the absence of physical controls.

Further, imports have not fallen, more or less, across the board. The biggest fall has occurred in the import of petroleum products of over 22%. However, domestic consumption has fallen less by 11%. Therefore, it remains a mystery as to how such a big quantum reduction in petroleum products has been achieved. The imports of transport and electrical equipment have also remained at low levels.

On the inflows side, there has been a contrasting development. Exports of goods and services have increased by almost 7%, but workers’ remittances have fallen by over 3%. Rice exports have increased by 70%, due to the big jump in international prices following India’s decision not to export rice. This increase has more than compensated for the fall of 7% in textiles exports.

There has been an increase in the deficit in primary income of $1.2 billion. During 2022-23, the repatriation of profits was severely restricted by the SBP, leading thereby to a fall of 80%. This year there has been a big increase of 160% in the outflow of profits up to January.

The potentially most important developments relate to the net inflows in the general government account. During the first seven months of 2023-24, there has been a total disbursement of $5.2 billion, as compared to $5.3 billion in the corresponding period of 2022-23.

There is need to appreciate that the inflow of loans includes the almost $1.9 billion from the IMF as part of the Stand-by facility. As such, the new inflows from multilateral and bilateral lenders are of $3.3 billion. This is 38% less than the loans from these sources last year.

Further, private lenders have stopped extending loan facilities to Pakistan in 2023-24. Pakistan has not been able to contract a new loan with international commercial banks or float a Euro/Sukuk bond this year. This is despite the inclusion of over $6 billion of such funding from these sources in the federal budget of 2023-24.

Another inexplicable development is the quantum reduction in external debt repayment. It has fallen by $4.4 billion to $3.4 billion only in the first seven months. How has this quantum reduction been achieved, and will it be sustained for the full year? These are key questions and will need to be answered.

Turning to the outlook for the remaining five months of 2023-24, there is need, first, to highlight the recent projections by the IMF in the January Staff Report.

The IMF expects that the current account deficit position will worsen significantly in the remainder of 2023-24. The deficit in the next five months is projected at $4.5 billion, as compared to only $1.1 billion in the first months. This is based largely on a quantum jump of imports of 56% from February to June 2024 as compared to an actual decline of 11% from July 2023 to January 2024.

This anticipated quantum jump in imports raises the fundamental issue of the IMF perspective on its future relationship with Pakistan. Hitherto, it has pragmatically accepted the SBP physical restriction of imports and resulting nominal stability in the value of the rupee. This was despite the agreement in the Stand-by facility that Pakistan would follow a market-determined exchange rate policy. Therefore, if Pakistan enters into a new programme with the IMF in the fourth quarter of 2023-24 then there is the likelihood that Pakistan may be asked to revert back to a market-based exchange rate policy.

The IMF also expects remittances to start rising once again in the remaining five months of 2023-24. The projected growth rate is 19%. This could also be due to the artificially low-level last year due to the diversion of flows to the hundi market in the presence of a big difference between the inter-bank and the open market exchange rate. Along with the increase anticipated in exports of 8% this should limit the current account deficit to 1.5% of the GDP in 2023-24, according to the IMF.

The key IMF projections relate to net inflow into the Government account in 2023-24. This is expected to be $6 billion, implying a net inflow of $4.2 billion in the next five months. This is a highly risky projection because the big jump anticipated in disbursements of $7 billion may not materialize if there is a significant time gap between the end of the Stand-by Facility and the commencement of a new Programme.

Overall, there are many elements of uncertainty and risks in the outlook for the balance of payments in 2023-24. First, the second and last review of the on-going IMF Stand-by Facility must be completed expeditiously by the new government without requiring any prior actions.

Second, export growth may be limited in coming months by the loss of competitiveness due to nominal stability in the value of the rupee and rising costs due to quantum jump in electricity and gas tariffs. It is truly remarkable that even with very low reserves providing import cover of only one-and-a-half months the real effective exchange rate index of the rupee has approached 100. The last time it happened was in June 21 when foreign exchange reserves had reached $17.3 billion and the import cover was more than three months.

Third, the inflows into the government account will be limited by the lack of loans by private creditors. The first seven months have witnessed increased inflows from multilaterals, including the IMF. There may not be much space left in the commitments for 2023-24 and the flows could diminish if there is a hiatus after the end of the Stand-by Facility.

In the event negotiations start with the IMF for a new Programme by the beginning of April there is inevitably a concern about the speed and extent to which consensus will be reached on difficult reforms. These include higher taxation of agriculture and retail trade, privatization of selected SOEs, and move towards sharing of subsidies and grants by federal and the provincial governments, including the possibility of privatization or provincialization of DISCOs. During the process of discussion on the package of reforms as part of the new IMF programme there will be higher uncertainty and likely drying up of inflows leading, thereby to a drawdown of the already low reserves.

We hope and pray that the next five months of 2023-24 will not witness any major drawdown of the foreign exchange reserves and that Pakistan will be able to raise them to $9 billion by June 2024, as projected by the IMF.

Copyright Business Recorder, 2024

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister

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