All key economic indicators are sending negative signals revealing precarious conditions of the state where not a single authority has anything concrete to halt the trend, the recent numbers of current account falling in red zone after three months of consecutive surplus hinted that authorities have to hammer out some proposals to IMF on war footing basis to deal with the economic crisis.
Recently renowned businessman while giving an interview that Sri Lanka suffered a default on the payment but started to limp back to its normalcy and would soon be out of the woods as tourism mainly is their driving force to generate the dollars-a back bone that has been on the track and consistent policies formulates to give an edge. While unfortunately Pakistan has no tourism industry or plan to generate revenues so the country would remain in the gloom. There has been a possibility in a decade or so even Afghanistan’s economy would be in better shape than Pakistan’s economy.
This is surely a glaring truth but our economic managers have no such plan to put the house in order and our authorities mostly narrate strategy of borrowing from the international donor agencies and bilateral countries. After every passing day the path of the recovery has been narrowing and the country has entered into a dark tunnel where substantial reforms are required.
Previous government trumpeting that they have narrowed down the current account deficit to $2.4 billion as compared with $17.4 billion of the corresponding year where last three months showed surplus in the current account numbers which belied the true picture as the government has been restricting the flows of imports. Half truth spoken only the current numbers were discussed as the authorities never mentioned the exports and remittance numbers of the last fiscal year.
Remittances and exports during the last fiscal year a short fall of $4 billion each or $8 billion in both of the regime giving a tremor to state’s economy, nothing has been done to revive the major spinner of the foreign exchange, rather continuous decline in the rupee forcing the overseas Pakistanis to send their hard earned money to go through hundi and hawla.
The government imposed restriction on imports as the foreign exchange reserves reached at its lowest ebb because the country has to pay debt and interest payments on external loans. The foreign exchange reserves in April 2022 held by the State Bank of Pakistan was at $10.5 billion enough to cater to the import needs of nearly two months. But the payment spree on external debts continued and foreign exchange reserves reached to a low of $3.1 billion in January 2023, forcing the government to impose the import restriction.
Other steps are also taken to stop forward buying dollars, a cash margin was also imposed and only food related items and petroleum products import were considered essential items to be imported. However, to qualify for the IMF loans a prior condition was imposed that the import restriction has to be removed. The government removed the restriction but still kept an hawkish eye on imports. But as soon as the foreign exchange reserves improved which was on borrowed funds- IMF $1.2 billion, Saudi Arabia $2 billion and $1 billion from UAE in July 2023, the reserves of the State Bank shot up to $8.7 billion, giving sigh of relief where the domestic currency also started giving positive signals. In single session on July 4, rupee recovered by almost 3.83% or Rs 10.55 to Rs 275.44.
But the recovery proved short lived and all optimism evaporated in thin air where the rupee since then received heavy beating and touched the 299 rupees mark on August 21, 2023, showing massive depreciation of around 8.8 percent making the imports costly. Though there has been no restriction from the government but businessmen feared about daily depreciation in the Pakistan rupee and were cautious about opening the letters of credit for imports. Imports in July again registered a decline of 26 percent to $3.7 billion as compared with $4.98 billion of the same month corresponding year.
Abdul Azeem head of research at Spectrum Securities said that Pakistan relies on imports for its production and consumption needs. Last year, the government restricted non-essential imports to manage US dollar outflows, negatively impacting GDP growth, projected at 0.3% in the fiscal year ended June 30, 2023 due to a 10.26% decline in LSM growth on per annum basis.
“The fragile economy and high unemployment make import restrictions non feasible. Increased USD demand, eased import policies, and higher oil prices caused significant rupee depreciation and higher inflation”, he said..
Abdul Azeem said that the government intervention is needed to stabilize the interbank market and curb inflation from higher import costs. While if slowdown in economic activities persisted, the government will face the hurdle in revenue collection and achieving the target of more than Rs 9415 billion in the current fiscal year would face hardships to meet.
Exports, remiitances and foreign investments needs serious redoing to generate dollars otherwise current account deficit would soar again. Already in July deficit hit $800 million, if the pace remains same full year, it might fall just under $10 billion level. Already during the last tenure of PML (N) current account deficit reached to all time high of $19.9 billion while last fiscal year of PTI was more than $17 billion, these huge deficits are enough to crumble the state’s economy. The high growth and steady increase in imports to run industries widen the trade deficit as imports in PTI tenure rose to whopping $80 billion. Country requires steady growth of 6 percent per annum to absorb the unemployment ratio, which continuously shows 6.3 percent per year. The government should immediately prepare a strategic plan how to curtail imports and all non-essential items should be discouraged to lower down the imports from $3 to $4 billion in first phase.
Amayed Ashfaq Toka, Advocate High Court, President Tola Associates said in FY23, administrative measures were taken to curtail the current account deficit to lessen the balance of payment crises in Pakistan.
The then Government was successful in curbing the CAD to a sustainable level of $2.387 billion in FY23.
For FY24, there should be a rationalization of imports of luxury items such as, inter-alia, high end motor vehicles, to manage the CAD.
In FY23, CKD and CBU car imports were recorded at $822 million. These levels need to be managed or further reduced to manage the import bill in FY 24 by levying or increasing the regulatory and countervailing duties on luxury items, he said.
Further, Pakistan exported cotton yarn worth $844 million in FY 23. The same can be retained for domestic consumption in FY 24, in order to reduce the import of raw cotton which stood at $1.679 billion in FY 23. This will reduce imported inflation, Amayed said.
Ali Nawaz, CEO Chase Securities said that in light of the challenges, it becomes imperative to explore innovative solutions to address Pakistan’s current account deficit.
Beyond conventional measures, some out-of-the-box strategies could involve:
Bilateral Trade Agreements: Forming strategic trade partnerships with economically robust nations can open new markets for Pakistani goods and services, balancing the trade equation.
Tourism and Services Sector Boost: Channeling efforts into enhancing the tourism and services sector can stimulate foreign currency inflows, reducing the deficit by capitalizing on Pakistan’s unique cultural and natural attractions.
Remittances as an Investment Source: Facilitating diaspora investments in sectors like real estate, startups, and infrastructure can contribute to foreign inflows and counter the deficit.
Currency Swap Agreements: Establishing currency swap agreements with trading partners can provide stability to the exchange rate and ease pressure on foreign reserves.
Ali said import restrictions may offer a temporary solution, a holistic approach that combines innovative strategies targeting exports, investments, and diversification is essential to sustainably manage Pakistan’s current account deficit. By embracing unconventional yet pragmatic solutions, Pakistan can pave the way towards a more balanced and resilient economy, he added.
Iffat Mankani CEO JS Investments said that recent approval of the bailout program by the IMF, we are adopting a more balanced approach to managing the current account.
This approach involves integrating businesses into the decision-making process. While this strategy might lead to currency devaluation, it aims to foster collaboration between local industries and financial managers to address the deficit and currency depreciation issues over the medium term.
“To find solutions, we can draw inspiration from neighboring countries that have faced similar challenges”, she said.
One effective strategy involves local businesses meeting their needs by concentrating on revenue generated from exports. However, on the regulatory side, it’s essential to address the issue of exporters channeling money through unofficial routes outside the country. Immediate measures should also encompass channeling resources primarily towards boosting agricultural exports, which can help stimulate trade flows. Additionally, exploring trade arrangements with other nations could prove beneficial, Iffat recommended.
