A bleak outlook

A head of next week’s $1 billion debt repayment, official reserves had further fallen to $5.8 billion as of December 23, 2022. They may slip below $5 billion if dollars are not urgently arranged in cash. Pakistan’s already struggling macroeconomic landscape has been struck a major blow by the devastation caused by the floods, rendering millions homeless. The preliminary damages have been estimated at more than $30 billion by the country’s National Disaster Management Authority.

This has resulted in growth forecasts for the second half of fiscal 2023 (FY23) being revised downward by the central bank, now projecting a GDP growth of close to two per cent from the previous estimation of three to four per cent. The flared political tensions and uncertainties surrounding macroeconomic decisions that had impacted the first half of 2022 abated to a major extent by the second half of 2022.

However, persistence of higher energy and commodity prices and foreign debt repayments precipitated the continuous fall of Pakistan’s foreign exchange reserves. The rupee continued to remain under pressure and depreciated by over 30 per cent. Contractionary monetary policies and supply-side pressures – expected to persist on both the local and international fronts – also make for a muted growth prediction in the real economy in FY23.

The government is targeting to bring the fiscal deficit down during the remaining financial year to 4.9 per cent of GDP, from 7.9 per cent in FY22 – an outcome that would be achieved through a combination of revenue and expenditure measures. It is safe to say that FY23 has got off to a good start in terms of the Federal Board of Revenue’s (FBR) collection exceeding its five-month (July-November) target for FY23. However, given that there will likely be slippages on the expenditure front with respect to rehabilitation efforts, the IMF is insisting on a higher collection in order to keep the fiscal and primary deficits within permissible levels.

There is currently an impasse between the government and IMF over the disbursement of the next tranche of $1 billion, with the fund and local authorities unable to agree on quantitative targets. Despite a higher tax collection, the fiscal deficit is expected to clock in at 6.5 per cent of the GDP due to higher debt servicing and potential slippages during the second half of FY23, owing to expenses related to elections and flood relief.

The IMF is continuing to pressure the government to tighten its spending, further raise electricity and gas prices, and impose additional taxes. However, while Finance Minister Ishaq Dar is trying to stave off the pressure to avoid the political fallout of such decisions, analysts believe that the finance minister does not have many options. Besides, Dar has so far failed to live up to his claims of fixing the economy and providing relief to the people. His bet on the IMF’s ninth instalment and the follow-on inflows thereof, do not inspire much confidence in the market.

The experiences of 2022 once again bring to fore the need to address the country’s structural weaknesses of a narrow base of foreign exchange earnings and meagre inflows of foreign investment. A concerted approach is required to encourage increased localization of the manufacturing base, along with lowering the energy intensity of the economy by ensuring energy efficiency and conservation. Moreover, there is an urgent need to formulate a well thought out strategy to meet the growing challenges related to climate change and food security situation.

Priority must be accorded to producing new varieties of seeds, that are suitable to varying weather conditions, and devising a framework that emphasises water management strategies to increase agricultural productivity. Our industrial sector must also be transformed into a high technology-intensive sector. However, all of this requires a voluminous increase in investment in physical and human resources for a sustained period of time.

Pakistan’s economic outlook seems dire as the year closes, with analysts fretting the country could end up like its regional neighbour Sri Lanka – unable to pay its debts, short on foreign reserves, and grappling with untenable, skyrocketing inflation. There is no doubt that the government is clearly in a bind over meeting the multiple economic challenges facing it. With no let-up in sight in the current situation, it is time people braced themselves for a tougher year ahead than the one they just endured.