EVEN by Pakistan’s own standards, the year 2022 was the toughest one in 75 years for its wobbly economy as it lurched from one crisis into another. The recurrent balance of payments crises are a consistent theme for the country’s economy because of fiscal profligacy, low productivity and exports, as well as heavy reliance on foreign debt and imports to support domestic consumption for economic growth. But what makes it different this time around is the added component of an unprecedented spike in global commodity prices.

With Pakistan using its foreign currency reserves more quickly than anticipated because of the elevated global commodity prices to meet its energy, food and industrial machinery and raw material needs, drying multilateral and bilateral dollar inflows amid worsening current account meant rapid erosion of the State Bank’s reserves from $17.6 billion to $6.7bn during the year. This is in spite of debt rollovers to the tune of $10bn by ‘friendly’ countries like China and Saudi Arabia, disbursement of fresh multilateral assistance of $4bn between July and November, and strict curbs imposed by the SBP to reduce the country’s burgeoning import bill and restrict other foreign exchange outflows.

With no let-up in economic gloom in sight, the foreign exchange crunch has caused the home currency to lose more than 27pc of its value, with the rupee hitting 224.94 to a dollar in the interbank market in mid-December. In between, the rupee twice fell close to 240 to a dollar — first towards the end of July and later in the third week of September. The exchange rate volatility, which took hold in the second quarter of 2022, led to dislocation in the market with banks offering different rates than the interbank, charging their customers as high spreads of Rs30-35 on each dollar as the greenback disappeared from the open market.

The weakening balance of payments situation created doubts about the government’s capacity to make timely foreign debt payments, stoking fear of a sovereign default a la Sri Lanka as the top global ratings agencies like Moody’s and Fitch downgraded Pakistan’s debt ratings into junk territory over shrinking reserves. The default worries were entrenched first because of a delay in the restoration of the IMF loan programme, which was signed in the summer of 2019 but suspended multiple times, and later when new tensions emerged between Islamabad and the lender over the unmet fiscal and other targets in the aftermath of catastrophic summer floods that caused economic and infrastructural losses of over $30bn. No wonder Nomura, a top Japanese investment bank, placed Pakistan among seven countries threatened by a currency crisis over a period of next 12 months. SBP Governor Jameel Ahmed’s reassurances that Pakistan’s full-year financing requirements of $32-34bn were fully covered and that the reserves will start building up in the first half of 2023 didn’t help quash the default speculations either.

The abrupt and massive exchange rate volatility has directly impacted upon the common man since we are overly reliant on imports, especially of energy and food that drive up prices of every good and service we consume. It is because of the sharp movement of the exchange rate that the country is facing high headline inflation averaging over 25pc and food inflation averaging above 31pc since June.

Though currency depreciation makes exports competitive in the international market, this doesn’t hold too true for economies like ours with low industrial productivity, narrow export base and heavy dependence on import of raw material, machinery and equipment for the export industry. Additionally, the deterioration in rupee-dollar parity cuts into the profits — in terms of dollars — of foreign investors repatriating to their shareholders abroad. Above all, it has serious implications for the government’s budget and fiscal position as the size of its foreign debt — in terms of rupees — goes up significantly due to devaluation.

Many believe that the present liquidity crisis stemmed from the political turmoil created by removal of the PTI government. But that isn’t totally correct, even if the no-confidence move against Imran Khan had fast-tracked the crisis already in the making due to his government’s populist budget for FY2022 by widening fiscal slippages and suspension of the IMF bailout over his decision to freeze energy prices to improve his popularity.

The appreciation and depreciation of the exchange rate is but only a symptom of the malaise ailing the nation’s moribund economy. The current troubles have their origin in our past and present fiscal extravagance.

Published in Dawn Yearender, January 1, 2023