The Pak government has further moved to pauperization as it was compelled to borrow PKR 1.961 trillion from commercial banks over about eight months of this fiscal year (between July 1, 2022 and March 3, 2023) to fill in fiscal gaps in its revenue and expenses. During the same period of the last year, the then PTI government had borrowed about one-third of this amount – PKR 619 billion, according to the State Bank of Pakistan (SBP). This is a pointer to the worsening fiscal crisis. During the last year of the PTI government the fiscal gap had widened much and the current government has mismanaged expenditure which deteriorated the gap further.
Pak economic crisis is already precarious and worsened further due to unsustainable fiscal deficit, or the gap between the government’s income and expenses. The worsening of the fiscal deficit has accentuated at the ongoing external account crisis. The foreign exchange reserves of the country were merely USD 4.319 billion as of March 10, 2023 as against USD 11.425 in end-March 2022, less than two weeks before the ouster of Imran Khan as prime minister. The rapid deterioration in Pakistan foreign exchange reserves indicates an imminent threat of default to Pakistan.
The management of external sector is becoming extremely challenging with a massive 52.5% depreciation in the rupee value. On March 17, 2023, the rupee traded at PKR 281.71 per US dollar in the interbank market. The worsening of exchange rate could be gauged from the fact that on April 8, 2022, the PKR-Dollar exchange rate was at 184.68 per dollar. Depreciation of domestic currency impinges on the repayment capacity of a country as its value decreases against the dollar which is used for repayment.
Many observers including from the multilateral agency apprehend that Pakistan’s deteriorating economy may cause social tension and unrest. Life of the common people is worsening fast. A sagging economy has curtailed employment opportunities and earning opportunities. Higher energy prices and food shortages after last year’s super floods pushed headline inflation up from 12.7% in March 2022 to 31.5% in February 2023. This has made cost of living unbearable. People are also facing longer power outages and shortages of basic goods including food and medicine.
In the immediate and short term, there is no respite in sight for Pakistan. During the current fiscal year ending in June, the fiscal deficit is likely to rise as the cost of external and internal debt servicing has increased due to the rupee’s decline and tightening of interest rates. This means the government will only continue to borrow more from commercial banks during the April-June quarter in FY 2022-23.
As fiscal deficit is expected to rise further, the government would continue to borrow, which may leave lesser resources in the banks for the private sector investment. Banks will keep investing funds in government debt papers instead of lending to the private sector. The private sector’s credit appetite is already low thanks to the withdrawal of subsidies, high energy prices and very high interest rates. The fiscal deficit will remain too large, and external sector financing gaps will remain big enough to give policymakers constant headaches in the remaining three months of this fiscal year.
The performance of the industrial sector is not heartening. Large-scale manufacturing (LSM) output in January this year recorded a yearly decline of 7.9%. And LSM data for seven months of this fiscal year (July 2022-Jan 2023) showed an average fall of 4.4%.
The political uncertainty is likely to deepen the economic mess while the next general elections are likely to take place in September-October, at the earliest. During these months how a coalition government with multiple pulls and pressures would succeed in pushing forward the reforms on which the release of the next tranche of the IMF bailout package hinges is a million dollar question. Even IMF seeks agreement between the government and opposition to carry on these reforms unhindered in both the cases – whether next election results retain the present government or the opposition again comes to power.
The challenges would remain peeping into the eyes of the economic policy makers whatever be the result of the next election. In the next fiscal year i.e. 2024-25 – beginning in July the ruling and opposition parties need to build a broader consensus among all stakeholders of the state to devise an economic policy for structural reforms and reconstruction and achieve fiscal consolidation by increasing revenue and cutting expenditure. Increasing exports and remittances would remain key to realising a balance in the external sector and increasing the foreign exchange reserves. However, the recessionary fears in the global economy would pose serious challenge to Pakistan to increase its exports and remittances.
Pakistan would also need to do a lot to improve its image from a terrorists’ haven and a country that disproportionately channelizes money to its military and intelligence institutions to one which is sincere on governance and a responsible state led not by fundamentalists but saner and rational people. It needs to cut its disproportionate military expenditure and shun its expensive long-range missile programmes at least till people get food and other essential items; government’s revenue increases and fiscal deficit is curtailed to a sustainable level; and forex reserves become robust. Coming to terms with reality and accepting them is what is called pragmatism, which Pakistani leaders completely lack. Pak economy is a saga of utter mismanagement and irresponsibility of the ruling class.
Meanwhile the situation of the external sector keeps on deteriorating. Merchandise exports in February 2023 slumped to USD 2.35 billion from USD 2.834 billion in February 2022, showing a decline of 18.7%, according to the Pakistan Bureau of Statistics (PBS). Overall exports in eight months of this fiscal year (July 2022-Feb 2023) also fell to USD 18.793 billion from USD 20.573 billion in the same period of the last year. The country requires a solid pro-export growth strategy but the question is that do the political leaders have time remaining to do so after wasting a lot of time and energy in senseless infighting.
It is irony that the Pak leaders are serving their personal egos and vested interests while the economy is into a free fall. The Bloomberg survey has confirmed that majority of economist have recessionary expectation about the Pak economy. The credit rating of the country is also going down. Moody’s recently downgraded Pakistan’s rating to Caaa3 – as per the company’s rating scale, only Ca (very near default) and C (defaulted) are below the country’s current standing. Default is coming closer, but Pak leaders are in a constant denial mode. Only time would tell if they could save the country from an imminent collapse