The year 2022 comes to an end with Pakistan being surrounded by economic uncertainty. The looming crisis is, currently, the talk of the town. Probably, more airtime is being consumed by debates on the economy’s fate than any other topic in the mainstream media. Therefore, it is worthwhile, to sum up our present economic condition and what lies ahead.
Let’s rewind a bit. December 2021 was probably the time when the alarm bells rang for the first time. The inflation was rising, reserves were on a gliding path and the government was forced to seek help from the IMF. The year 2022 began with a mini-budget of additional tax measures and the SBP amendment bill. However, before the IMF’s bailout was approved, the vote of no confidence (VONC) happened and ousted Prime Minister, Imran Khan, gave a parting gift to the nation by announcing unfunded subsidies and effectively sabotaging the IMF deal.
“Although in December last year, the PTI government had restarted the much-needed IMF programme, in February, faced with a vote of no-confidence, it opted to sacrifice the national interest for political interest and scuttled the IMF programme, giving unfunded subsidies for electricity and petrol, and another amnesty to business. It was this breaking of the IMF agreement that set in motion the upward trend in our default risk,” Miftah Ismail wrote for Dawn.
The economic crisis was further aggravated due to mounting external pressures because of the Russia-Ukraine war.
What transpired afterwards was probably one of the worst financial years for the country in recent times. The rupee had a freefall, interest rates were doubled, and inflation rate spiralled.
As Things Stand
According to the latest figures released by the State Bank of Pakistan (SBP), the import cover has been reduced to around a month and the foreign exchange reserves are at an eight-year low. A shortage of currency in the open market has given rise to a parallel market which is accelerating the exodus of dollar from the country. Inflation is hovering around 25 percent for the last few months.
“Core inflation continued to surge, growing 1.3% MoM, which is a 6th consecutive 1%+ MoM number. Core continues to be SBP’s focus and will be critical in policy decisions. On a YoY basis, the core remained flat at 16.2%. We expect inflation to remain at current levels over the next few months, barring any external shock. We estimate FY23 avg inflation at 23.5%,” read the CPI Review – Nov’22 by Ismail Iqbal Securities.
The country has been preserving its reserves through import restrictions (now lifted), making it practically impossible for foreign-held companies to repatriate their dividends/profits and other restrictions, including those imposed on foreign-bound travellers.
Among this chaos, there was a fall in remittances as expats opted for the parallel market to transact.
“Pakistan's Remittances continue to drop, down 14% YoY / 5% MoM Major decline has come from Saudi and UAE. These countries are not witnessing economic challenges as such, which indicates that the gap between official and Hawala/Hundi rate is the major factor behind the decline,” posted Fahad Rauf, head of research at Ismail Iqbal Securities.
On the revenue front, Federal Board of Revenue (FBR) has currently collected around Rs3.01 trillion in the fiscal year 2023 (July-June) against a target of Rs3.65 trillion. Therefore, the FBR is trailing by a massive Rs635 billion with the first half of the year almost ending. Further, if the trend continues, the collection of Rs7.47 trillion by June 2023 seems a distant dream. Meeting the tax target is one of the prerequisites of Pakistan’s deal with the IMF and a failure to do so would trigger a series of contingency measures, including a mini-budget.
“The Pakistani outlook for FY2023 (ending 30 June 2023) has deteriorated under heavy flooding that began in mid-June. The economy was already struggling to regain macroeconomic and fiscal stability before the floods, which adversely affected cotton, rice, and other important crops. As wheat is usually planted from mid-October, flood damage threatens the upcoming agricultural season as well.
“The flooding is expected to have spillover effects on industry, notably textiles and food processing, and on services, in particular wholesale trade and transportation. Flood disruption and damage are expected to slow real GDP growth in combination with a tight monetary stance, high inflation, and an unconducive global environment,” states Asian Development Outlook by the Asian Development Bank.
Due to climate headwinds, economic uncertainty and political instability, the Asian Development Bank reduced Pakistan’s GDP growth outlook to 3.5 percent in FY 2023 (6 percent in FY 2022).
Against the backdrop of all the turmoil, Pakistan’s stock market had one of its worst years since the 2008 financial crisis. The bourse registered negative returns of 9 percent in PKR and 29 percent in dollar terms. Investors were low on confidence and resorted to profit-taking.
The 1.2-billion-dollar question
The country is at a stage where the forex reserves are essentially negative given the fact that what is with the SBP is also owed to “friendly” countries. With a $1 billion repayment falling due in the first week of January, the reserves are likely to fall further.
So, are we really going to default?
“Technical definition of default refers to a failure to meet a foreign debt obligation. In Pakistan’s case, the immediate threat is a balance of payment crisis rather than a default. If the deadlock with IMF and bilateral lenders prevails, there is a high possibility of the country being on the verge of a balance of payment crisis by February-March 2023,” said Khurram Husain, senior business and economy journalist, in a recent interview.
Failing to meet dollar demand for imports would result in fuel and food shortages. However, the question remains, are we there yet?
“Between Jan-Mar 2023, $8 billion in repayments are due out of which, around 50 percent is expected to be rolled over. This means the country requires about $3-$4 billion for repayments immediately. These amounts are arranged for, but contingent on revival of the IMF program. If it resumes, the crisis could be averted for the time being,” said Dr. Farrukh Saleem, a senior journalist and analyst, during an interview.
What stands between Pakistan and the much-needed loan tranche are a few measures, namely, additional taxes to meet the revenue target, reducing the circular debt and a free-floating exchange rate. The government is likely to implement these through various steps including a mini-budget. However, what is delaying the inevitable is the unwillingness of the current regime to lose any further political capital. Those in power are searching for a face saving. Rumours of a technocratic setup are being floated as an option to deal with the difficult times that lie ahead.
Let’s rewind a bit. December 2021 was probably the time when the alarm bells rang for the first time. The inflation was rising, reserves were on a gliding path and the government was forced to seek help from the IMF. The year 2022 began with a mini-budget of additional tax measures and the SBP amendment bill. However, before the IMF’s bailout was approved, the vote of no confidence (VONC) happened and ousted Prime Minister, Imran Khan, gave a parting gift to the nation by announcing unfunded subsidies and effectively sabotaging the IMF deal.
“Although in December last year, the PTI government had restarted the much-needed IMF programme, in February, faced with a vote of no-confidence, it opted to sacrifice the national interest for political interest and scuttled the IMF programme, giving unfunded subsidies for electricity and petrol, and another amnesty to business. It was this breaking of the IMF agreement that set in motion the upward trend in our default risk,” Miftah Ismail wrote for Dawn.
The economic crisis was further aggravated due to mounting external pressures because of the Russia-Ukraine war.
What transpired afterwards was probably one of the worst financial years for the country in recent times. The rupee had a freefall, interest rates were doubled, and inflation rate spiralled.
As Things Stand
According to the latest figures released by the State Bank of Pakistan (SBP), the import cover has been reduced to around a month and the foreign exchange reserves are at an eight-year low. A shortage of currency in the open market has given rise to a parallel market which is accelerating the exodus of dollar from the country. Inflation is hovering around 25 percent for the last few months.
“Core inflation continued to surge, growing 1.3% MoM, which is a 6th consecutive 1%+ MoM number. Core continues to be SBP’s focus and will be critical in policy decisions. On a YoY basis, the core remained flat at 16.2%. We expect inflation to remain at current levels over the next few months, barring any external shock. We estimate FY23 avg inflation at 23.5%,” read the CPI Review – Nov’22 by Ismail Iqbal Securities.
The country has been preserving its reserves through import restrictions (now lifted), making it practically impossible for foreign-held companies to repatriate their dividends/profits and other restrictions, including those imposed on foreign-bound travellers.
Among this chaos, there was a fall in remittances as expats opted for the parallel market to transact.
“Pakistan's Remittances continue to drop, down 14% YoY / 5% MoM Major decline has come from Saudi and UAE. These countries are not witnessing economic challenges as such, which indicates that the gap between official and Hawala/Hundi rate is the major factor behind the decline,” posted Fahad Rauf, head of research at Ismail Iqbal Securities.
On the revenue front, Federal Board of Revenue (FBR) has currently collected around Rs3.01 trillion in the fiscal year 2023 (July-June) against a target of Rs3.65 trillion. Therefore, the FBR is trailing by a massive Rs635 billion with the first half of the year almost ending. Further, if the trend continues, the collection of Rs7.47 trillion by June 2023 seems a distant dream. Meeting the tax target is one of the prerequisites of Pakistan’s deal with the IMF and a failure to do so would trigger a series of contingency measures, including a mini-budget.
“The Pakistani outlook for FY2023 (ending 30 June 2023) has deteriorated under heavy flooding that began in mid-June. The economy was already struggling to regain macroeconomic and fiscal stability before the floods, which adversely affected cotton, rice, and other important crops. As wheat is usually planted from mid-October, flood damage threatens the upcoming agricultural season as well.
“The flooding is expected to have spillover effects on industry, notably textiles and food processing, and on services, in particular wholesale trade and transportation. Flood disruption and damage are expected to slow real GDP growth in combination with a tight monetary stance, high inflation, and an unconducive global environment,” states Asian Development Outlook by the Asian Development Bank.
Due to climate headwinds, economic uncertainty and political instability, the Asian Development Bank reduced Pakistan’s GDP growth outlook to 3.5 percent in FY 2023 (6 percent in FY 2022).
Against the backdrop of all the turmoil, Pakistan’s stock market had one of its worst years since the 2008 financial crisis. The bourse registered negative returns of 9 percent in PKR and 29 percent in dollar terms. Investors were low on confidence and resorted to profit-taking.
The 1.2-billion-dollar question
The country is at a stage where the forex reserves are essentially negative given the fact that what is with the SBP is also owed to “friendly” countries. With a $1 billion repayment falling due in the first week of January, the reserves are likely to fall further.
So, are we really going to default?
“Technical definition of default refers to a failure to meet a foreign debt obligation. In Pakistan’s case, the immediate threat is a balance of payment crisis rather than a default. If the deadlock with IMF and bilateral lenders prevails, there is a high possibility of the country being on the verge of a balance of payment crisis by February-March 2023,” said Khurram Husain, senior business and economy journalist, in a recent interview.
Failing to meet dollar demand for imports would result in fuel and food shortages. However, the question remains, are we there yet?
“Between Jan-Mar 2023, $8 billion in repayments are due out of which, around 50 percent is expected to be rolled over. This means the country requires about $3-$4 billion for repayments immediately. These amounts are arranged for, but contingent on revival of the IMF program. If it resumes, the crisis could be averted for the time being,” said Dr. Farrukh Saleem, a senior journalist and analyst, during an interview.
What stands between Pakistan and the much-needed loan tranche are a few measures, namely, additional taxes to meet the revenue target, reducing the circular debt and a free-floating exchange rate. The government is likely to implement these through various steps including a mini-budget. However, what is delaying the inevitable is the unwillingness of the current regime to lose any further political capital. Those in power are searching for a face saving. Rumours of a technocratic setup are being floated as an option to deal with the difficult times that lie ahead.