In Pakistan, a peaceful transition of power took place recently. Yet, it has raised near-term policy uncertainty at a time when the country is grappling with external and fiscal issues as a result of rising commodity prices and an increase in global risk aversion. What remains to be seen is the new government’s ability to repay its external debt in the medium term is dependent on its policy agenda and the upcoming budget, which may be heavily dominated by our widening circular debt and our reliance on the international donor agencies.
However, this may be an uphill task as the international experts at Fitch Ratings predict the current-account deficit of roughly five per cent of GDP (around USD18.5 billion) for the fiscal year ending June 2022 up, from four per cent compared to their February review. This is mainly attributed to the current oil price hikes that will continue to push the current account deficit further adding to the already jacked-up external financing needs that result from a high debt-repayment cycle. Pakistan’s debt crisis has been taking its toll on the fragile economy, which stood at a staggering Rs. 42.8 trillion by February 2022. Pakistan’s current account deficit is expected to reach USD 18.5 billion this fiscal year, according to the IMF’s World Economic Outlook released in Washington. Previously, it predicted a USD 12.9 billion deficit for FY2022. Increased trade deficits and financial outflows have pushed the Pakistani rupee far lower against the US dollar. This, together with debt repayments, has put pressure on the State Bank of Pakistan’s (SBP) liquid foreign-exchange reserves, which declined by USD5.1 billion to USD11.3 billion between end-February and 1 April 2022. Additionally, this drop represents the repayment of a USD2.4 billion loan from China that is scheduled to be extended.
Pakistan, as the World Economic Outlook projects, will require gross external financing of more than USD 35 billion this fiscal year, with a current account deficit of 5.3 per cent of GDP in FY2022. Additionally, the IMF increased its inflation forecast for Pakistan to 12.7 per cent on average for the current fiscal year, up from 9.4 per cent previously.
From Europe to Sri Lanka, and now Pakistan, being the latest victim of economic crisis and social unrest leading to political turmoil, the challenges ahead cannot be termed as transitionary.
This reports hints at the haunting reality and Pakistan’s dependence on foreign financing further indicating the need to knock on the IMF’s door. In my opinion, the previous government’s adoption of reforms in accordance with an IMF programme aided in establishing its access to global debt markets. Pakistan demonstrated this by issuing a USD1 billion Sukuk in January 2022. Since then, external factors such as rising US interest rates and increased investor risk aversion due to the Ukraine war have harmed the country’s access to private creditor finance. However, it is expected that failures in reform or the IMF programme would exacerbate access difficulties.
The change in government may make it more difficult to complete the remaining three IMF programme evaluations on time. Senior officials from the new government’s core parties have indicated that they intend to retain contact with the IMF. However, negotiations over critical revenue-raising reforms may prove protracted, especially given the government’s broad coalition of divergent political parties. New fuel subsidies announced in March to combat inflation have already complicated programme discussions and medium-term budget consolidation, as have approaching elections, which are still scheduled for mid-2023.
I strongly believe that we can come out of these tough economic circumstances provided the political representatives are able to achieve the much-needed stability and the commodity prices are closely monitored and controlled. Also, the bilateral financing access of Pakistan from its close ally China may be in hot waters due to the overall impression of the current regime to be more in favour of the US and its allies. This will test the political wit and patience of the newly formed cabinet members who will have to tread carefully on a balancing act without triggering either of the economic giants. Also, the political instability is threatening the collection of remittances in Pakistan which has so far kept the country afloat in a testing economic situation.
From Europe to Sri Lanka and now Pakistan being the latest victim of economic crisis and social unrest leading to political turmoil, the challenges ahead cannot be termed as transitionary. The vicious cycle may recur if the economic turmoil is not controlled. The only consolation that the newly sworn-in government can have is that the presence of panic in the commodity and financial markets; a worldwide inflationary spiral; rising food costs; and an uptick in protests, particularly in emerging nations, demonstrate that this process is not limited to Pakistan. However, thoughts like these may lead to undue complacency while to get out of the turmoil demands an extremely proactive approach.
The writer is the Foreign Secretary-General for BRI College, China. He tweets @DrHasnain_javed.