The historic challenges tested the global economy in 2022, from Russia’s invasion of Ukraine and the sharp slowdown in China to surging inflation and rising interest rates. Challenges and cataclysms witnessed by the world during the last three years, mostly due to Covid-19 and unpredicted climate change and other ongoing issues, are unprecedented. Every country from Australia to America and from Canada to Chad has seen wearisome and difficult times.
The after-effects of Covid-19 still persist, giving rise to new global economic chaos. High inflation and supply line nightmares coupled with uncontrollable prices of essential food items are the issues that are making human life miserable in every country of the world.
However, there is a silver lining in the cloud. The recovery is expected in Asia’s economic growth as industrial activity and services reactivate and consumption rebounds, as there is a relaxation of Covid-19-related restrictions and the reopening of borders in many countries. The GDP growth in the region is expected to soften gradually over the period of 2024-35, though it will remain above the global average.
The Accommodative Macroeconomic Policy
Though over the past twenty years, Pakistan has achieved significant poverty reduction but human development outcomes have lagged behind and economic growth is still unstable and sluggish. Despite rapid poverty reduction, human capital outcomes have remained standstill and deprived, with high levels of inhibiting at 38% and learning poverty at 75%. Growth of per capita gross domestic product (GDP) has been low, averaging only around 2.1% annually over 2000-18. The Covid-19 pandemic has also had serious impacts on human development outcomes and economic growth.
Supported by accommodative macroeconomic policy, Pakistan’s economy saw robust growth in FY22, at the cost of growing economic imbalances. The government has begun to further tighten policy to constrain aggregate demand.
The year 2020 was opened, and the government was moving desperately to complete the sixth review of the IMF program which was signed in July 2019. Due to Covid-19, the said program was suspended in March 2020. The government tried to negotiate with IMF with a conscious effort to resume it but couldn’t able to begin before March 2021. On March 24, the IMF approved the release of Pakistan’s tranche of $500 million. A few days later Pakistan issued $2.5 billion in Eurobonds plus another $1.5 billion borrowed from the World Bank. In one week immediately after the board approval of the IMF review, Pakistan borrowed $4.4 billion from global markets and international financial institutions.
Foreign exchange reserves began depleting in September 2021, falling relentlessly month after month ever since. The current account balance had remained briefly in surplus between May and November 2020, but plunged into an escalated shortfall from the next month, continuing relentlessly month after month.
In November the government also requested another $3 billion deposit from Saudi Arabia in a desperate attempt to shore up the foreign exchange reserves and received in December. But the reserves continued to fall at an accelerating pace. In June 2021 the deficit came in at $1.64 billion, in November it touched $1.93 billion, and in December another $1.86 billion. Dollars were flying out of the economy faster than they could be brought in. In January 2022, the government went to the international capital markets with another $1 billion Sukuk bond. By this point the government had borrowed a cumulative $5 billion in two months alone, adding to the $4.4 billion borrowed in March 2021.
An emergency approach for borrowing from Saudi Arabia, an emergency meeting of the State Bank’s monetary policy committee followed by two rapid interest rate hikes, the hasty passage of the required legislation to unlock the IMF review, and the rushed flotation of a Eurobond even before the fund’s executive board had sat down to deliberate over Pakistan’s case were signs that there was growing desperation within the government to shore up the plummeting foreign exchange reserves.
In February, the IMF released $1 billion. The government once again defaulted on its commitments and within weeks announced a massive subsidy on petrol and diesel, abandoned its plan to meet its failing year-end revenue target through taxes on these fuels, and went on to announce yet another amnesty scheme. Only a few days before this announcement, the Russian invasion of Ukraine began and oil prices sharply increased in March from $91 per barrel to touch $120. The seventh review was scheduled for March 2022 but it stumbled and never came to completion due to a vote of no confidence.
Here began one of the most grueling adjustments that Pakistan has ever had to undertake. The IMF demanded not just a rollback of the “unfunded subsidies” but also a recuperation of the revenue losses suffered by the government as a result of rolling back on fuel taxes in February. It took the new government nearly two months to comply, undertaking the sharpest fuel price hikes ever done by any government in the past. Unfortunately by June, most of the IMF targets were missed. In March the oil prices climbed to US$ 120 per barrel, resulting in Pakistan having an inflationary spiral.
By June 2022 the first signs of a potential balance of payments crisis began to emerge. Import restrictions were being tightened to near-strangulation levels, cargoes began piling up in the ports, and banks were forced to borrow at a loss from forward markets in order to retire essential LCs for the import of fuel.
By July, talk of a default escalated. Holders of Pakistani bonds around the world began wondering whether they are better off selling their paper at a loss immediately rather than taking the risk of a total collapse in their prices down the road. By the middle of July, all eyes were focused on the ongoing parleys between Ismail and the IMF on the completion of the seventh review.
Pakistan’s external financing requirements for the fiscal year had shot up to $33 billion, despite a sharp contraction of the current account deficit projected under the fund program. In October another $6.3 billion rollover was sought (with maturities a little later in the fiscal year). In November, the $3 billion Saudi deposit received the previous year had to be rolled over and then in December, a maturing Eurobond worth $1 billion had to be repaid. Along the way, another few billion dollars of debt taken from private banks had to be repaid as well.
The review was finally completed by end-August 2022, as IMF talks were derailed by withdrawing from a commitment to run a fiscal surplus in the province they controlled. As the year closed, Pakistan had not defaulted on its external debt service obligations, but it was struggling to maintain its external trade with dollar shortages so severe the interbank market was largely shut down.
Maintaining progress toward macroeconomic stabilization
The year ended as it began. Severe dollar shortages, desperate attempts to get back onto an IMF program, and a government struggling to halt the erosion of its political capital in the face of rising inflation. The faces changed but the situation remained the same, only more aggravated than it was at the start.
The government faces a difficult policy challenge in supporting relief and recovery while maintaining progress toward macroeconomic stabilization.
Significant downside risks include:
- Unexpected damages from the floods as on-the-ground damage assessments continue
- Political instability which may undermine a coherent and timely policy response;
- Worsening external conditions, including unforeseen increases in global commodity prices and interest rates;
- Risks associated with large domestic and external financing needs, especially in the context of banking sector liquidity constraints.
To manage the above risks, it will be critical to adhere to sound overall economic management and reinforcement of market sentiment, including through articulating and effectively implementing a clear strategy for economic recovery; constraining fiscal expenditures to the extent possible and carefully targeting any new expenditures; maintaining a tight monetary stance and flexible exchange rate; and remaining on-track with critical structural reforms, including in the energy sector.
Pakistan’s Economy in 2023
It seems that the year 2023 will be a tough year. Our experts are falling due to the international recession, and our exporters will have to compete harder to get a share of the contracted export market. The impact of global conditions on our economy cannot be avoided as we are integrated with the international economy to the extent of our imports and exports. The exporters have been given incentives so that they can compete and increase their market share in current conditions. On the other hand, Pakistan is required to have incentive remittances. But when the world is in recession, no economist can promise that we can fix things in our country. By this, we might have a cushion for our businesses against the impact of global shocks on them.
As far as growth is concerned, I hope that it will start improving from the next fiscal year from the projected 2% this year, depending on how quickly we revive our economy. Pakistan may not be able to achieve 5-6% GDP growth immediately in the subsequent years without addressing structural issues but the economy will start showing improvements.
The International Monetary Fund (IMF) has projected the GDP growth rate for Pakistan at 3.5% for 2023 against 6% in 2022, but it does not include the impact of the recent floods. The Fund has projected an inflation rate of 19.9% for 2023 against 12.1% in 2022. However, the report has projected consumer prices for the end of the period of 2023 at 15% against 21.3% in 2022. The current account balance is projected at negative 2.5% for 2023 compared to negative 4.6% for 2022.
The Fund has projected an increase in unemployment in Pakistan to 6.4% in 2023 compared to 6.2% in 2022. Global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022 but to decline to 6.5% in 2023 and to 4.1% by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.
The Risk of Being a Defaulter
- The current government would deploy all possible resources and efforts to avoid such an eventuality due to a heavy political cost, particularly in the context of forthcoming elections.
- The international partners of Pakistan would not like such a situation due to the potential negative implications for internal and external security.
- The multilateral and bilateral donors are still hopeful for an economic recovery in Pakistan and would bet upon it rather than default and lose repayments.
Default on sovereign debt is a difficult situation for any country and donors, but it is very much part of the global economic system, and there have been some countries that defaulted on sovereign debts in recent years. In Pakistan, however, it has been politicized and raised to such a level of concern and debate that it sounds catastrophic.
Any common citizen would ask what can we do to avoid default, and the easiest and the most accurate response would be to stop taking further loans and generate revenue to meet current expenditures and forthcoming repayments of external and internal debt. Unfortunately, such an easy response is the most difficult governance issue in Pakistan.
It is difficult due to the fact that we are focusing on temporary solutions such as going to the IMF and other donors and friendly countries for bilateral support. We can easily track and trace the so-called brilliant efforts of successive governments in managing multilateral and bilateral donors and a new form of support called friendly deposits.
A single-digit tax-to-GDP ratio, with more than 60% of revenue generated through indirect taxes and GDP in excess of $300 billion, is the real point of concern, not the rounds of negotiations with the IMF. It may even sound redundant to say that we need to expand the tax and revenue base rather than the incidence and rates of current taxpayers.
At the same time, have we ever done a performance audit of public sector expenditure? The financial audits result in stories of misappropriations of billions of rupees every year and in almost every sector. However, a real performance audit would unearth much more astonishing stories.
There is hardly a concept of value for money in our public sector expenditure. For the sake of example, take any federal ministry and assess the expenditure on salaries of staff versus the non-salary but unproductive and overhead expenditure that goes unnoticed mostly.
The story about so-called public sector development expenditure is totally on another level. One should do a simple arithmetic of adding up all such expenditures and outlays in the last 50 years and the resulting figure should be more than enough to make every city in Pakistan like Paris or London and roads like those of Germany and the education and health systems like the ones in Europe and so on.
A look at the budget deficit, high levels of inflation, lack of medium to short-term economic planning, and rupee devaluation does not result in any hopeful situation for the future unless there are sustained, sustainable and concerted efforts toward mitigation of the aforementioned challenges.
In the very near future, the year 2023, the default on sovereign debt by Pakistan may be avoided or postponed due to the above mentioned factors; unfortunately, not for very long though, unless we look inwards rather than outwards.
The author is freelance writer, columnist, blogger and motivational speaker. He write articles on diversified topics. He could be contacted at nazir_shaikh86@hotmailcom.