An economic crisis has engulfed Pakistan. The consumer price index inflation for November clocked in at 23.8 per cent on a year-over-year basis which translates into an average of a little over 25pc for the first five months of the current financial year.

The foreign exchange reserves held by the central bank have fallen by 60pc to $6.71 billion (by early December) from $16.6bn in January. Meanwhile, the rupee continues to lose ground against the US dollar.

Against this backdrop, the meaningful decline in the current account deficit has come as a sigh of relief for the battered economy. But this is hardly the time for the government to pat itself on the back. The policymakers must take immediate steps to ensure the decline in current account deficit remains sustainable, especially since there are red flags.

As a reminder, the country registered a 47pc year-over-year drop in the current account deficit for the first four months of the financial year to $2.82bn, thanks to the fall in imports, data released by the State Bank of Pakistan (SBP) shows.

Imports have remained low, with their dollar values showing year-over-year drops in every month of the ongoing fiscal year, according to SBP data.

However, there’s a catch. Although a portion of the 11.6pc drop in imports (goods and services) seen this year could be due to the economic slowdown, some of it can be attributed to the extreme measures taken by the central bank to restrict imports, like delays in the opening of Letters of Credits (LCs).

Administrative measures to control imports won’t last long, especially since they are also hurting the economy and likely violate conditions placed by the country’s lenders

Such administrative measures to control imports likely won’t last for long, especially since they are also hurting the economy, including the export-oriented industries, and likely violate conditions placed by the country’s lenders. Once these controls are removed, imports may climb back up to some extent, which can adversely affect the current account deficit.

On the other hand, the increase in the policy rate, such as the 100 basis point increase to 16pc recently announced by the central bank, can also cut down import demand. High-interest rates should push the country’s aggregate demand lower, leading to a drop in demand for imports.

Market-determined devaluation of the local currency, which makes imported goods more expensive and reduces their demand, can also curb imports. Effective use of both tools, which are at the State Bank’s disposal, can have a more lasting impact on import contraction than administrative measures.

Moreover, to keep a lid on imports, policymakers must also find ways to reduce the country’s energy bill by strengthening refineries and taking energy conservation steps.

More than $6bn worth of energy products, including crude oil, petrol, diesel, and LNG, were imported in the first four months of the financial year, as per the Pakistan Bureau of Statistics (PBS).

This was equivalent to 29pc of the total imports of all goods.

Pakistan will receive some respite from the drop in crude oil prices. The country spent $1.7 billion in the first four months of FY23 on buying 2.4 million tonnes of crude oil, with an average final price of $98 per barrel, as per the PBS report.

With Brent hovering in the low-$80s per barrel range, the crude oil import bill should decline moving forward. However, more needs to be done, especially on the refined petroleum products front, which came with a hefty price tag of $2.84bn.

Pakistan usually gets most of its petrol and around 35pc of its diesel from abroad, but with the domestic oil refineries facing shutdown threats and running their plants at unusually low utilisation rates, pressure on imports might increase.

The refining sector is facing numerous problems, including lacklustre demand for furnace oil and the above-mentioned delays in the opening of LCs. This has dented refinery utilisation rates, which may cause a drop in diesel and petrol production.

Pakistan can, however, considerably reduce imports of petroleum products and ease the burden on imports. To do this, the government should make serious efforts to ensure that domestic oil refineries run their plants at healthy utilisation rates of over 90pc.

This could be an unpopular decision since it might require running some power plants on expensive furnace oil for a while. But the benefit to the economy that might come from an increase in the production of petrol and diesel will likely outweigh the cost of a minor increase in electricity bills.

A thorough cost-benefit analysis should be conducted in this regard.

Moreover, energy efficiency and conservation measures should be implemented at the earliest to cut down consumption of all imported fuels, including LNG. Tough decisions, like early closure of commercial markets and marriage halls as well as the reduction in working hours, must be considered to stem the outflow of foreign exchange.

At the same time, policymakers must also find ways to enhance foreign exchange inflows through exports and remittances to shore up reserves. Increasing exports, however, is easier said than done, particularly at a time when the economies of the US, Europe, and China — Pakistan’s key export markets — have also come under stress.

However, giving unconditional subsidies to the export sector — such as the Rs100bn subsidised electricity package recently promised by the federal government — in the hopes of growing exports won’t help. If anything, such measures will likely reduce fiscal space for the cash-strapped government.

The 8.6pc decline in remittances seen in the first four months of this year, as reported by the central bank, is also worrying. This could be due to a number of factors, such as the Saudisation of the workforce in Saudi Arabia, anaemic growth in labour exports to the UAE in the last couple of years, the uncertain political environment at home, and the potential increase in usage of illegal routes (hawala/hundi) due to the unusually large difference between the official and unofficial exchange rates.

The policymakers must examine this closely to arrest the slide in remittances. This is critical, considering monthly remittance flows often match or exceed export earnings.

The author focuses on business and economics. Email:
Twitter: @sa_cubes

Published in Dawn, The Business and Finance Weekly, December 19th, 2022

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