The worsening cycle

Published October 17, 2022

In its latest forecasts, the International Monetary Fund (IMF) says Germany and Italy will be in recession next year, and GDP growth in the US will be just one per cent, down from an estimated 1.6pc this year. Bad news for Pakistan exports.

The Fund also says that economic growth in China will inch up to 4.4pc in 2023, up from an estimated 3.2pc in 2022. Growth in Britain will be a negligible 0.3pc, down from 3.6pc. More bad news for exports.

About 47pc of our merchandise export earnings originate from these five countries. Low GDP growth in 2022 and a recession/slowdown in 2023 will surely hit our exports.

Pakistan’s exports in July-September 2022 totalled $7.125 billion, up only marginally from $6.996bn in July-September 2021. Demand for exports will be hit during this fiscal year ending in June 2023 because of the paled/bleak growth forecasts in the above-named large economies. Exports demand will also be hit because the IMF believes that overall global GDP growth in 2023 will be 2.7pc down from an estimated 3.2pc in 2022.

Except for about $1bn worth of foreign aid expected to come in response to the UN-Pakistan joint appeal for the flood victims, all other sources of forex inflows would be debt-creating

At home, political polarisation is growing day by day, taking a toll on governance and economic activity. Energy shortages and disruption in energy supplies persist, industrial output is declining, and agriculture and livestock continue to suffer from the recent floods. The government has very little to offer to the export-oriented sectors in terms of subsidies. In the best-case scenario, our goods’ exports during this fiscal year may reach just $30bn.

Meanwhile, remittances continued to fall during July-September 2022, totalling around $7.685bn, down more than 6pc from $8.199bn in July-September 2021. There are several reasons for the declining trend in remittances, including the one regarding base effect, but long-prevailing political chaos in the country tops the list. Overseas Pakistanis continue to send enough remittances for their dependents living in Pakistan, and they also continue to invest in high-yielding government bonds and treasury bills via famous Roshan Digital Accounts.

But they have apparently slowed remittances for investment in Pakistan’s real estate and construction sector as political uncertainty grows while they get a better return on savings in their host countries where central banks are tightening interest rates unprecedently.

Continuation of a declining trend in remittances is very much likely In the remaining three quarters of this fiscal year for the above reasons and also because conditions in job markets in Saudi Arabia and the UAE — two major host countries of Pakistani diaspora — may worsen in 2023 due to forecasted global economic slowdown. We should not expect more than $31bn in remittances in the current fiscal year ending in June against the target of $33.2bn.

Now add up the expected goods’ export earnings of $30bn and remittances of $31bn, and you get $61bn. The key question is can Pakistan manage to contain its goods’ import bill at this level?

Overseas Pakistanis have slowed remittances for investment in the country’s real estate and construction sectors

In the first quarter of this fiscal year, goods’ imports consumed $16.334bn despite restrictions on imports of luxury goods plus delayed and restricted financing of import letters of credit for almost all non-essential items.

The government has recently allowed the clearance of the piled-up requests of financing of import letters of credit worth $50,000 in a phased manner. That is why the rupee has once again come under pressure after recovering smartly against the dollar in the past two weeks.

As the government and the State Bank of Pakistan allow freer imports to facilitate a modest economic recovery and to carry out post-flood rehabilitation and reconstruction work, import payments will rise. Imports bill is sure to expand to make up for commodities like cotton, wheat and fruits, vegetables and pluses lost in the flooding.

This means the import bill can reach nearly $70bn for 2022-23. Compare this number with the total expected forex earnings through goods exports ($30bn) and remittances ($31bn), and you get a huge gap of $9bn.

Statistical evidence suggests that whenever Pakistan fails to finance its goods import bill through goods exports and remittances, the current account deficit expands — if not simultaneously, with some time lag.

How on earth will the central bank keep the rupee stable amidst the expanding current account deficit?

The current deficit for July-August 2022 was slightly less than $2bn. Even if the deficit keeps growing by $1bn a month throughout the year, the total yearly deficit will be $12bn. One way to keep the rupee stable even amidst a growing deficit could be dollar pumping by the central bank in the interbank market.

Currently, the SBP’s forex reserves are at a three-year low ($7.597bn as of October 7). Policymakers are pinning hopes for forex reserves building on post-flood international assistance, bilateral debt rescheduling — and of course on foreign funding by “friendly countries”.

Except for about $1bn worth of foreign aid expected to come in response to the UN-Pakistan joint appeal for the flood victims, all other sources of forex inflows would eventually be debt-creating — regardless of when that debt is to be repaid. That will only add to the “debt stress” that Pakistan is already facing.

Unless current political uncertainty ends and all political forces join hands to chalk out a medium-term strategy to fix external account issues and give as much impetus to GDP growth as possible, external borrowings will not help ease the “debt stress” we are experiencing.

Pakistan’s total external debt and liabilities stood around $130.2bn in June 2022, up from $122.3bn in June 2021. The country had to spend $11.554bn during the last fiscal year on servicing these debts and liabilities, up from $10.188bn a year earlier, according to SBP.

Published in Dawn, The Business and Finance Weekly, October 17th, 2022

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