After the successful completion of the combined seventh and eighth reviews, Pakistan has eventually received the long standing $1.16 billion from the International Monetary Fund (IMF) which is deemed to spur the economy, underpin the local currency and last but not the least inflate the confidence of our friendly countries in terms of financial help which is desperately requisite at this juncture. The approval of an extension of the IMF program until the end of June 2023 is accreditation for the economy of Pakistan in the given circumstances, to be precise.
Pakistan’s perennial economic woes are the outcome of the burgeoning trade deficit in the wake of colossal and prodigious import bill. Economically viable countries world over are export-oriented. The nominal GDP of the Philippines is $450 billion vis-à-vis $348 billion of Pakistan however exports the Philippines are $103 billion vis-à-vis $32 billion of Pakistan. It is food for thought. Pakistan incurred unprecedented trade deficit of $48 billion the preceding fiscal year which compelled the economic machinery of the country to seek external help to put the house in order. If an economy worth $348 billion imports goods and services amounting to over $80 billion, it is tantamount to a debacle of our import substitution policies, if any.
In the wake of the paucity of dollars, the local currency bears the brunt which eventually compels the economic managers to look for foreign sources to mitigate the adverse impact at the earliest. Pakistan obtained $1.16 billion from the IMF besides the financial pledges and transfers from the friendly countries which propped the local currency for time being if not in the long run. It is expected that Pakistani rupee could improve to less than Rs200 per dollar in the days to come hopefully.
The local currency plummeted to an incredible record low of 240 to a dollar in the last week of July this year which unnerved all and sundry. However the rupee recouped losses to great extent for 11 consecutive sessions closing at Rs213 in the interbank in the second week of August bringing stability in the exchange rate. This recovery dispelled concerns of millions of Pakistanis. There would be further flow of dollars in the shape of remittances amounting to around $31 billion during this fiscal from the Pakistani diaspora. It is always icing on the cake. The US dollar traded at Rs167 preceding September which may not be witnessed any time soon. The devaluation of the rupee is considered alarming as the inflow of high cost of imported goods spurs inflation.
Some experts reckon that IMF program would bring economic stability and the Pakistan Stock Exchange would perform better however numerous individuals deem IMF program inflationary in nature. The proponents reckon that through IMF requirement, we need to expand social safety to protect the most vulnerable and accelerate structural reforms including improvement in the performance of state-owned enterprises (SOEs) and governance which is going to help the economy of the country.
Besides, a tight monetary policy at the discount rate of 15% would help reduce inflation and help address external imbalances. It is presumed by some experts that the $6 billion bailout accord signed in 2019 by Pakistan and the IMF must continue for the benefit of the country’s economy. The detractors of IMF program deem it detrimental since the government has to slowly but surely hike the petroleum development levy (PDL) on oil products to a maximum of Rs50 per liter to collect Rs855bn during the current fiscal year. This is inflationary measure which eventually would debilitate the middle, lower middle, and the impoverished strata of the country. In the first week of the last month, the PDL was raised by Rs10 on petrol and by Rs5 each on HSD, kerosene and light diesel oil (LDO). These measures may prove counterproductive however they are sine qua non since the IMF has already expressed concern about Pakistan’s non-compliance with the deal by the erstwhile government.
Let’s see what transpires in the not-too-distant future with the surge in electricity prices and imposition of additional taxes.