Aiming for high growth without reforming the country’s growth structure is wishful thinking on the part of the government
Economic turmoil during the first half of the fiscal year in Pakistan meant that the government and its policies remained unstable. A budget that promised to pacify voters and reclaim political capital instead produced an outcome contrary to what was originally envisioned. This perpetual economic quagmire has prompted many political commentators to predict that the days of this regime are numbered.
Pakistan suffered from a trade deficit during this period, with imports surging to $40.6 billion in the first half of FY 2021-22, while exports hit $15.1 billion. dollars over the same period. This means that Pakistan’s trade deficit more than doubled during this period. However, with remittances of $15.8 billion, incumbents managed to reduce the current account deficit (CAD) to less than $10 billion for the months of July to December 2021. However, this may not even be close to what the government envisioned in June.
Therefore, the resulting economic fallout has surprised many stakeholders, as the fiscal plan has just been drawn up in June 2021 and the platform for potential growth has been established. So what went so wrong that it prompted the finance minister to revise his entire approach to dealing with Pakistan’s emerging economic problems in a matter of months?
The urge to bolster growth with an “election budget” seemed parochial given the historic growth of Pakistan’s economy. The data suggests that Pakistanis have a low propensity to save and that the consumption needs of Pakistani citizens are largely met by imported products rather than domestically produced goods.
The country that was once touted as having the potential to be a self-sufficient agro-economy is now a net importer of food. In addition, Pakistan depends on the import of crude oil (Brent) and gaseous liquid nitrogen (LNG). Pakistan’s disadvantage in this respect is only exacerbated because the price of these two fuels is growing internationally. Consequently, Pakistan will have to bear the brunt of a large trade deficit and recurrent cycles of boom and bust until it limits its dependence on these imported products. Aiming for high growth without reforming the country’s growth structure is just wishful thinking on the part of the government.
Moreover, the widening trade deficit put considerable pressure on the rupee and an increase in imports led to a sharp rise in prices. The monthly consumer price index (CPI) stood at 12.3% for December 2021, with the six-month average standing at just under 10%.
In the midst of all this, the International Monetary Fund (IMF) handed Pakistan a list of austerity measures in order to make fiscal adjustments, develop a positive policy rate and increase the Bank’s autonomy. State of Pakistan (SBP). Consequently, the SBP raised the interest rate twice to 9.75%, while the government legislated on the autonomy of the SBP and presented a supplementary finance bill (commonly known as a mini-budget) to remedy the latter. This puts Pakistan on track to pocket a billion dollar slice.
Despite being in a difficult situation, the Pakistani government Tehreek-e-Insaf (PTI) has managed to maintain the spiral of remittances from the outgoing fiscal year. Along with this, exports soared to over $15 billion in the first half of FY21-22, and the country could record over $30 billion in exports for the first time in its history. .
The PTI urgently needs to revamp its economic strategy. It must strike the right balance between stimulating growth and managing the vortex of external accounts. Paradoxically, the resumption of the IMF program may well be a blessing in disguise for sympathizers of the ruling party since it will stabilize the currency as well as the capital and monetary markets. In addition, a possible decline in global commodity and energy prices in the future could act as an invisible force to help keep inflation in check.
Prime Minister Imran Khan, Finance Minister Shaukat Tarin and all those tasked with solving Pakistan’s financial problems have a daunting task ahead of them. While the economic challenges ahead of us are difficult, they are certainly not insurmountable.