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A Better Second Half

A Better Second Half
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January 01, 2024 (MLN): The nation was enjoying its Eid-ul-Azha vacation which was initiated on June 28, 2023. However, there was a trepidation that the first working day after Eid could be a worst nightmare for the country as it may default in case of no helping hand from the IMF.

Very few would have believed that on this “Meaty Eid”, the then-premier Shahbaz Sharif would be on a mission to get ‘Eidi’ from the fund in the form of a last-minute Stand by Arrangement (SBA) that would unlock $3 billion in funding over the next 9 months and pull the plug on the country defaulting, at least in the near term.

IMF was not happy with the measures taken in the country’s budget which was to be implemented from the 1st of July, and the government seemed to pay no heed to the fund’s concerns.

The tug of war between both parties lasted till the end moment when the browbeat by the finance team went in vain and the premier had to take the matter into his hands.

His last-minute flight of rescue resulted in success as the government went on its knees to address the concerns of the IMF by making appropriate amendments to the fiscal plan. This provided much-needed support, especially to the ailing forex reserve position which plummeted to $4 billion in June.

Since then, the country has been trying to get back on its feet and improvements are also apparent in the major economic indicators. The policy rate which was hiked by 100bps at the ultimate moment to appease IMF has remained stable since then.

It is also believed that the monetary tightening has reached its peak and the second half of the fiscal year may witness a dovish monetary stance. It may be possible due to the declining trend in the inflation rates.

The CPI which touched the highest levels of 37.97% in May 2023 started to cool down and has remained mostly below 30%, though still at elevated levels. Consequently, the real interest rates on a forward-looking basis remain positive.

This decline in inflation can be attributed to the high base effect and the decline in global commodity prices. In addition, the agricultural produce has also ramped up by 5.06% with important crops like rice and cotton increasing by 21% and 11%, respectively.

This remarkable growth along with 2.48% growth in industry and a paltry growth of 0.82% in the services sector resulted in the country’s GDP enhancing by 2.13% in the first quarter.

The external account position of the country also ameliorated with the current account deficit during the first five months of the current fiscal year declining by almost 64% to $1.16 billion during July-November 2023.

The month of November also witnessed a favourable balance of a meagre $9 million after recording four consecutive adverse figures for FY24. Though the country lifted a curb on imports, it witnessed a decline in imports by 17.32% to $21.55 billion compared to $26.064 billion in the same period last year.

Exports on the other hand recorded a minor increase of 1.93% to $12.172 billion from $11.942 billion in the first five months of FY23. Remittances however posed a gloomy picture as they shrank by 10% to $11 billion during the first five months.

The grim outlook of external inflows despite the IMF program is expected to leave an external financing gap of $6-$7 billion as per economist Hafiz Pasha, and the incumbents expect the CAD to shrink to $4.5 billion to counter the slowdown in external inflows and declining remittances.

As per the incumbent finance minister, the country expects $4.5 billion from multilateral and bilateral creditors during the current fiscal year.

The caretakers also played a crucial role in the stability of the exchange market by clamping down against illegal exchange businesses.

The rupee which was at a nadir of Rs307.1/$ in the interbank market and Rs330/$ in the open market on September 07 took a reverse gear to appreciate by 6.1% and become the best-performing currency in September.

It peaked at Rs275/$ during mid-October and currently hovers around Rs285. The improving CAD position and the smooth review conducted by the IMF resulted in the much-needed stability of the exchange rate.

Recently, Fitch maintained Pakistan’s long-term foreign currency issuer default rating at ‘CCC’ which was downgraded to ‘CCC-’ in February 2023 from ‘CCC+’ in October 2022 before upgrading again to ‘CCC’ in July 2023.

The caretakers are also fortunate enough to witness the declining trend in global crude prices despite the Israel-Palestine conflict and OPEC+ production cuts. Though they initially raised the prices massively prompting them to surge to Rs.330/litre, they later passed on the benefit of declining global crude prices to the consumers.

However, considering the prices before they assumed office, not much has changed and the price remains exorbitant. Nonetheless, this decline will decelerate the inflation rate already irking the masses.

Is the economy out of hot water? The answer may be NO! Though the inflation remains below the high touched in May 2023, the average five-month inflation remains 28.6%, much higher than the target inflation rate of 21.9%, the attainment of which seems implausible.

The forex reserves of SBP also remain vulnerable at $7.2 billion and far below the target level of $9 billion at FY24 end. The financial account has also turned red, counteracting the gains of reduced CAD.

The slowdown in external inflows will further pressure the country’s reserve position.

Conducting free and fair elections as per the decided date in February also remains pivotal in achieving political-cum-economic stability.

The new government will have to enter a new medium-term IMF program and address the structural issues inherent in the system to ensure smooth sailing of the economy in the future, or else the vicious cycle of IMF bailout will persist.

Copyright Mettis Link News


Posted on: 2024-01-01T11:48:45+05:00