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Pakistan’s Economy: Out Of The Woods

A Better Second Half
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November 26, 2023 (MLN): Is the country experiencing a major turnaround in its economic environment which remained ominous till the striking of a last-minute deal with IMF that helped unlock funding of $1.2 billion in the first tranche?

In a contrary scenario, the country defaulting on its external obligations was imminent. The recent successful review will pave the way for $710 million in the country’s treasury, providing much-needed support to the already fragile yet much-improved position of the SBP reserves.

The current account balance has displayed a remarkable improvement in the four months of FY24. July 2023 was the first month when the current account balance turned negative after four consecutive months of favourable balance, the overall current account deficit (CAD) shrank by two-thirds compared to the same period last year when CAD was recorded at $3.1bn.

This remarkable improvement was evidenced despite lifting import control measures. The administrative actions to check smuggling of greenback not only averted the pressure on PKR which reached historic lows of 300+/$ but also enhanced the remittances from formal channels, providing support to the ailing PKR.

Inflation has remained the major issue which irked the masses. The Consumer Price Index (CPI) which touched the highest-ever level of 37.97% in May 2023 seems to be cooling down now with headline inflation for the month of October clocking in at 26.9%.

Despite a comparatively low figure, the burden on the masses persists. The falling global commodity prices, reduced demand-side pressures owing to restrictive monetary and fiscal stance as well and high base effect are the root causes of declining inflation figures.

War in the Middle East remains a threat which can skyrocket commodity prices, having an adverse impact on price stability.

The national kitty which was left with $3.54bn of SBP reserves at the end of FY23 has gained strength amid the resumption of the IMF program, foreign inflows and the improving current account deficit position. The reserves currently stand at $7.2bn, almost twice the levels witnessed five months back.

However, considering the fact that the country owes more than $100 billion in the upcoming few years and its import figures surpass the combined figures of exports and remittances, the outlook may not be upbeat.

Since the debt has surpassed acceptable levels and the efforts of restructuring multilateral and G-20 country loans remained futile, the country’s reserve position may remain inadequate.

The country needs to seriously ponder upon measures to amplify its exports, which in the current fiscal year may remain below its peak of $32bn witnessed in FY22. Otherwise, the economic growth will remain vulnerable and the stability in currency levels will remain short-lived.

Though the successful review of the IMF will unlock $700m, the authorities should not be much exalted. There is a lot to be done for sustainable economic growth. The country’s effort for fiscal consolidation, energy sector reforms, flexible exchange rate mechanism and SOE reforms have been acknowledged by the fund; however, it’s not over till the fat lady sings.

It is evident that the country will have to enter a new IMF program once the 9-month SBA concludes. A dire need exists for long-term and consistent economic policies which should be independent of political bias.

Otherwise, the vicious circle of burdening the public and entering the IMF program to avert crisis may never end!

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Posted on: 2023-11-26T00:46:39+05:00