The year 2022 was another challenging one for Pakistan’s economy. The government started the year with hopes of the conclusion of the sixth review of the $6 billion International Monetary Fund (IMF) Extended Fund Facility early and of the beginning of disbursement of the $1bn tranche.
However, it was not to be as IMF had linked the release with five prior actions, including more autonomy to the State Bank, withdrawal of tax exemptions and increase in energy tariffs. Without the continuation of the IMF programme, a loan default was perceived to be imminent.
The economic situation faced further headwinds when the Russian-Ukraine war started on 24 February 2022. Commodity prices, especially energy, edible oil and wheat, started rising quickly, and supply chains were disrupted.
In particular, the surge in oil prices to more than $120 a barrel put the economy in a rather tenuous situation. Considering the political instability, the then government opted not to raise oil prices and, in a surprising move, cut pump prices by Rs10 per litre and froze them until the next budget. This decision was unsustainable and further delayed the revival of the IMF program.
The only way forward for the current government is to complete the ongoing IMF programme as per the extended schedule of June 2023
A major political development occurred in April when a coalition government replaced the PTI government through a vote of no-confidence. Realising the gravity of economic crises, the incoming government made economic revival its top priority. It also learned that the only way to restore some confidence would be to bring the IMF programme back on track immediately.
As a result, the government had to take unpopular decisions, such as raising oil prices to match its costs. Due to this, the already high inflation level reached its highest level in 14 years.
While the economy was still under the weather, unusual monsoons started hitting the country. During July and August, the rainfall was nearly three times higher than the 30-year average, resulting in one of the world’s worst floods with a tremendous loss of life and property.
An internationally supported study estimated the damages and economic losses to be over $30bn. According to the analysis, flood after-effects may increase the poverty rate by up to 4 percentage points, potentially pushing over eight million people into poverty. GDP growth may also fall to about three per cent, according to estimates.
At the end of August when the government had met all the preconditions, the IMF agreed to release the pending tranche of $1.1 billion. It also approved an increase in the loan size to $6.5bn and extended its expiry date till June 2023.
This release came as a significant relief, and at least for the immediate future, it substantially reduced any chances of default. It was a critical success moment for Miftah Ismail as then finance minister, but the government decided to part ways with him and brought in its old hand, Mr Ishaq Dar.
After Mr Dar became the finance minister, there was an evident change in policies. These included reneging our commitment to the IMF to rely more on the market-determined exchange rate rather than administrative measures and further higher adjustment of energy prices if the situation so demands.
These changes rattled the IMF, which has postponed its planned visit to Pakistan to complete the 9th review. Since the two major international rating agencies, Moody’s and Fitch, have recently downgraded Pakistan’s sovereign credit rating into junk territory, Pakistan does not have the option to raise any loans from the international market.
With Pakistan’s reserves falling to a dangerously low level of $6bn or just enough for a month’s import, the danger of default is once again looming on the horizon.
Even though commodity prices have declined recently, decreasing our import bill, Pakistan’s economy remains challenging. Since 2018, we have had six finance ministers. Such rapid changes have been counterproductive and only resulted in delaying important decisions.
Reneging on our commitments to an IMF programme has never worked. The only way forward for the current government is to complete the ongoing IMF programme as per the extended schedule of June 2023. If we can do so and if the commodity prices continue their existing downward trend, there is some hope that we could start looking towards a much-sought-after economic revival during the New Year.
The writer is currently serving as an arbitrator for WTO trade disputes. Previously he has served as Pakistan’s ambassador to WTO and FAO’s representative to United Nations in Geneva
Published in Dawn, The Business and Finance Weekly, January 2nd, 2023
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