IMF program has now been resumed while government has also changed its Finance Minister in April 2021. A number of events happened in March, Pakistan got the IMF review board approval and Pakistan also floated Euro bond in March 2021 after five years. Just one day before the floatation of the euro bond, finance minister who signed the bond and documents was fired. Surprisingly, IMF has not yet released Memorandum on Economic and Financial Policy paper, which it signed with Pakistan in 2019. This document contains the terms and conditions on which Pakistan got the bailout package from IMF. This also contains what would be the fiscal and revenue targets, level of net reserves, and debt to GDP percentage. It is in the common knowledge that IMF has asked government to provide autonomy to SBP and NEPRA, which is a debatable point. In normal days, IMF usually uploads such document within days but this time, it has delayed by few months. Therefore, there is still a curiosity about the terms and conditions agreed by Pakistan.
Pakistan has received USD 500 million out of USD 2 billion bailout package from IMF while it also received USD 2.5 billion from the issuance of euro bond. The next finance minister, Shaukat Tarin announced that the IMF package would be revised and would be renegotiated. He claimed that the pro-poor polices will be made and focus will be on the growth.
During the Covid crisis; Pakistan’s SME sector has badly affected and is facing tremendous financial stress. In order to provide relief to SMEs, Government of Pakistan issued a number of special financing schemes. As a matter of fact; it is always difficult for SMEs to build reserves consequently they have to rely on their cash flows. SMEs in Pakistan are struggling to operate while a number of outlets have shut down so far and millions are jobless now.
There are numerous ways to measure the potential impact of pandemic outbreaks on the economy. The State Bank has significantly contributed to the crisis response. It has undertaken considerable monetary policy easing, for which there was room given high inflation and additional measures to increase liquidity in the market and support businesses. However, despite these efforts, bank lending to the private sector remained low. The State Bank has come up with few schemes for SMEs since the beginning of the pandemic. Easy loans are being offered to SMEs with marginal interest rates for retaining their employees. Temporary economic financing scheme were also launched. In Pakistan, one of the main sources of entertainment is outdoor dining but due to the third wave of Covid; restaurants and marriage halls are shut down and a lot of related business have suffered badly. In addition; tax rates, fuel prices and energy rates have gone up, which has also put a negative impact on the business.
Despite all odds; Pakistan’s economy is bouncing back, which shows the resilience of the retail sector. Government is supporting textile sector big time. Textile sector has also shown positive signs while exports have increased during last few months. Construction sector is progressing very well and a lot of activity can be witnessed. As per the industry experts; construction sector is one sector which can alone help the country in recovering its economy. Government of Pakistan has given lucrative benefits to the construction industry that includes tax incentives, waivers and subsidies for builders, developers and property owners. Despite Covid; people are investing in the real estate sector while overseas Pakistanis are also remitting funds through banking channels, which is mainly going into the real estate sector. Government is working on affordable housing and that too for a limited number of people from low income group. Therefore, the real activity in the construction industry is coming from the private sector. Though activities in the construction sector are increasing yet we see price hike in the construction material and in the related cost.
Inflation is one of the key challenges government is facing these months. People’s earnings are not increasing while cost of living is increasing many folds. An improved trade balance and strong remittance inflows has narrowed the current account deficit. A sharp drop in imports in 2020-21 offsets the decline in exports. However, despite high inflows, reserves are not sufficient to fund the external liabilities therefore reliance is on IMF and heavy borrowings. In recent months; rupee has also appreciated against US Dollar which has a positive impact on the overall economy. Sale of automobiles has increased, which shows people have appetite to spend on luxuries. Pakistan’s economic dynamics apparently work differently than the rest of the world; no established parameters apply on Pakistan on happening of any activity.
Pakistan is also experiencing a difficult time in protecting its agriculture sector from the adverse consequences of pandemic considering the potential threats of food insecurity. As per an estimate, 37 percent of the people in Pakistan are suffering from food insecurity issues. The farming sector of Pakistan has not only served as a backbone for food security but has always been a major support to the economy, being the highest contributor to GDP. Pakistan is the 8th largest producer of wheat, 10th largest of rice, 5th of sugarcane and 4th largest producer of milk in the world. Before the advent of Covid, the agriculture sector was sustaining the impact of wide-scale locust attack which severely damaged various crops exerting economic stress on the associated farmers.
Due to Covid, education sector has badly affected, educational institutions are closed most of the times while few have the online facilities. Educational standard in Pakistan is already not as per the international standard and lockdown and online study have further put the pressure on the educational sector. In coming months; government should incentivize and provide subsidies to education, health and SME sector so as to help them recover from the negative fallouts of Covid. While putting a lot of efforts for the revival of the economy; it is equally important for the government to transform Board of Investment to act as one stop solution provider where it should manage all the approvals from various government departments. This will help attracting foreign investors.