Was 2022-23 Pakistan's Worst Financial Year?

The finance minister of the incumbent PDM coalition government presented an economic survey considered to be a pre-requisite to the yearly budget. As expected the survey did confirm the dismal economic situation faced by the country though the official efforts tried to remain upbeat but all indicators point out otherwise.

Contrary to the official projections, the World Bank projections mentioned Pakistan’s economy to grow by two per cent in the next fiscal year as compared to the 3.5 per cent target set by the financial mandarins of the PDM coalition government.

It is quite obvious now that the financial team of the incumbent government proved itself completely out of its depth despite the hype created about its ability and expertise. The
aura surrounding the incumbent financial czar currently serving as the finance minister has all but disappeared and he is now labeled as part of the problem instead of its solution. Most problematic aspect of the situation is almost total detachment from reality harboured by the
incumbent financial team that appears to be badly confined to a time warp and does not possess to come out of its cocoon.

Moreover, the financial head of the team has not abandoned his tendency to bluster with his brusqueness knowing no bounds deeply irritating all stakeholders associated with Pakistan’s economy.

The World Bank has pointed out that in Pakistan, the lasting effects of the August 2022 floods, along with policy uncertainty and limited foreign exchange resources to pay for imports of food, energy, and intermediate inputs, have depressed activity with industrial
production contracting by about 25 per cent in the year.

With dwindling foreign exchange reserves and stagnant remittances the coalition government has increased exchange rate flexibility allowing the Pakistani rupee to depreciate by 20 per cent since the start of the year and consequently headline consumer price inflation has risen sharply reaching 38 per cent in the year, its highest level since records began in the late 1970s.

At the same time, it also noted that policy rate increases in Pakistan have not kept pace with expected inflation; consequently, real interest rates have turned deeply negative. This means the World Bank wants Pakistan’s central bank to further increase policy rates from an existing peak of 21 per cent.

Import restrictions imposed by the coalition government have adversely affected economic activity. Agriculture output seems likely to have contracted for the first time in two decades.

Economic recovery in the next two fiscal years is expected to be anaemic with the growth of 2% and 3%, respectively as there is limited fiscal room for the government to support recovery from flood-related damages.

Risks to the outlook are mainly to the downside and include adverse spillover from possible further advanced-economy monetary policy tightening or banking sector stress, sharper-than-expected tightening of domestic macroeconomic policies to anchor inflation expectations or stabilise foreign exchange reserves, social tensions arising from food insecurity, and extreme weather events related to climate change.

The World Bank warned that if such risks materialise, they could worsen economic and humanitarian crises and may also give rise to crises in other economies in the region.

The official survey report mentioned that Pakistan achieved GDP growth of 0.29 per cent for the outgoing fiscal year missing the target of 5 per cent by a wide margin.

This paltry growth came on the back of 1.55%, -2.94% and 0.86% growth in the Agriculture, Industry and Services sectors respectively, all three missing their targets comprehensively.

Most notable was the 2.94% contraction in the industrial sector against a target of 7.1% growth. The survey pointed out that Pakistan registered inflation of 28.2 per cent against 11 per cent in the same period last year.

The government had targeted inflation at 11.5% for FY2023, missing its target significantly because of a sharp depreciation of the rupee and global supply shocks resulting in pricey
imports.

The increase in inflation was broad-based with all categories recording higher inflation except for communication services and that across product categories, inflation for transportation, given its direct link to fuel prices, registered a sharp increase of 52.8 per cent against 19.4 per cent.

Housing, water, electricity, gas and other fuel recorded an increase of 13.6% as against 11% during the same period last year.

The increase in domestic energy prices was attributed to rising global oil prices, exchange rate depreciation and adjustment in energy tariffs/petroleum levy.

Meanwhile, it said perishable food items were the main contributory factor in jacking up food inflation.

The survey shows that Pakistan’s exports declined by 9.9% to $21 billion compared to $23 billion in the same period last year. Meanwhile, imports amounted to $43.7 billion compared to $58.9 billion in the same period last year, reflecting a decline of 25.7 per cent. This reduction came primarily because of policy tightening and other administrative measures as the government sought to protect its depleting foreign exchange reserves. As a result, the country’s trade deficit significantly shrank to 6 per cent of GDP compared to 10.4 per cent from last year.

The current account balance improved by 74.1%, recording a deficit of $3.4 billion against a deficit of $13 billion in the year-ago period. This led to the current account deficit shrinking to 1 per cent of the GDP, compared to 4.7 per cent during the same period last year.

The predominant factor behind this improvement was the 29.7 per cent decrease in the merchandise trade deficit on the back of substantial decline in import payments to $41.5 billion from $ 52.7 billion last year.

In this backdrop the oncoming budget is known to be extremely challenging with uncertainties related to elections and foreign funding required to cover the massive external account financing gap of about $25 billion during the next financial year, amid deepening domestic political crises and unfavourable global economic circumstances.

The coalition government led by PMLN would be hardpressed to appease voters as the prospects of their performance before the elections appear quite bleak for them.

There is hardly any fiscal space left to maneuver and the coalition government may be left with no option but to go for populist measures. The government may accordingly bring about a large fiscal stimulus in the shape of development allocations to recoup some of its lost political capital but to many analysts this way forward may prove disastrous for the economy that is already on the verge of default.

Though the government has already choked the economy to avoid a default as foreign funding dries up due to its cold relationship with the IMF but the government has to choose between the devil and the deep sea.

In this state of affairs a populist budget will be fraught with the risk of Pakistan being pushed deeper into economic depression and away from multilateral
and bilateral lenders.

In the dire financial conditions Pakistan needs foreign financing including loan rollovers of more than $77 billion to meet its external debt payments over the next three years but this course of action could not be taken with the blessings of the IMF and in their absence the IMF may be very tough proposition to proceed ahead with.

The problems have been multiplied due to scarce revenue collection as they are known to barely cover debt-servicing costs. There is hardly any chance of allocating satisfactory amounts for finance, development, defence, salaries and pensions.