Economic challenges exacerbate structural weakness

But there is optimism in the years ahead

Agriculture continues to be the mainstay of the Pakistani economy (World Bank Photo)

Staff Reporter
Auckland, August 14, 2022

Although Pakistan is facing a series of economic challenges, perpetrated by Covid-19 and other global developments, the people of the country and the Pakistani Diaspora are upbeat about the future and are marking their country’s Independence Day today with gaiety and solidarity.

Pakistan attained independence from the British Raj on August 14, 1947, a day before India gained independence. Both countries have been locked in territorial disputes since then and yet, it is not uncommon for the two communities to celebrate several social and community occasions such as Vaisakhi, Diwali, Eid Al Fitr, Eid Al Adha, Christmas and New Year together.

Prime Minister Shehbaz Sharif outlined the problems faced by his country during his address t the Nation on August 13, 2022, which can be found on our website www.indiannewslink.co.nz

The World Bank, in its Report, said that since imposing a widespread lockdown in response to the first Covid-19 wave, Pakistan has been effectively using localised lockdowns to curb the infection spread, allowing economic activity to largely continue. Expansion of the national cash transfer program, a mass vaccination campaign, accommodative macroeconomic policies, and supportive measures for the financial sector, all helped mitigate the adverse effects of the pandemic. As a result, the growth of real GDP at constant factor 2015-16 prices rebounded to 5.6% in Financial Year 2021, after contracting by 1% in Financial Year 2020.

Sustained recovery

Nevertheless, long-standing structural weaknesses of the economy and low productivity growth pose risks to a sustained recovery. Strong aggregate demand pressures, in part due to previously accommodative fiscal and monetary policies, paired with the continued less conducive external environment for exports have contributed to a record-high trade deficit, weighing on the Rupee and the country’s limited external buffers.

Increasingly, women are being trained in computer skills in Pakistan (World Bank Photo)

“During July-December 2021 (H1 FY22), indicators have mostly signalled positive economic momentum. With continued improvement in community mobility and still robust official remittance inflows, private consumption is estimated to have strengthened. Similarly, investment is also expected to have increased with strong growth of machinery imports and government development expenditure. Government consumption also grew strongly with vaccine procurement. On the production side, agricultural output, mainly rice and sugarcane increased, reflecting better weather conditions. Similarly, large-scale manufacturing growth rose to 7.5% year-to-year in H1 FY22, higher than 1.5% for H1 FY21. In contrast, business and consumer confidence have fallen since June 2021, partly due to concerns about higher inflation and interest rates,” the World Bank Report said.

Rising inflation

Headline inflation rose to an average of 9.8% year-on-year H1 FY22 from 8.6% in H1 FY21, driven by surging global commodity prices and a weaker exchange rate. Similarly, core inflation has been increasing since September 2021. Accordingly, the State Bank of Pakistan has been unwinding its expansionary monetary stance since September 2021, raising the policy rate by a cumulative 275 basis points (bps) and banks’ cash reserve requirement by 100 bps.

The current account deficit (CAD) in H1 FY22 widened to US$ 9 billion, from a surplus of US$1.2 billion in H1 FY21, as import values surged by 54.4%, doubling the 27.3% growth in export values. Double-digit growth in remittances in H1 FY22 helped to finance the record-high trade deficit. The financial account recorded net inflows of US$ 10.1 billion, supported by the new IMF SDR allocation, short-term Government deposits from Saudi Arabia, and a Eurobond issuance in July 2021. In January-February, the government obtained US$2.1 billion from International Sukuks and the IMF Extended Fund Facility (EFF). Despite these inflows, foreign exchange reserves had fallen to US$ 13.5 billion by March 25, 2022, equivalent to two months of imports of goods and services.

Meanwhile, the Pakistan Rupee depreciated by 14.3% against the U.S. dollar from July 2021 to end-March 2022.

Despite the high tax revenue growth with the surge in imports, the fiscal deficit widened by 20.6% in H1 FY22 due to higher spending on vaccine procurement, settlement of power sector arrears, and development projects. Public debt, including guaranteed debt, reached 70.7% of GDP in end-December 2021, compared to 72% in end-December 2020. To complement the tighter monetary policy, the government approved a Supplementary Finance Bill in January 2022, withdrew tax exemptions, and cut back on federal development spending, while protecting social sector spending.

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