Pakistan’s economic prospects in the short run are bleak.
The global economy is transitioning towards supposed stability. Bustling inflation - once an occasional vice - now seems like a focal point in the chorus of policymakers. While developed economies buckle down to tightening the screws on easy money, this hawkish turn is a negative shift for the developing world. The global supply-side constraints are already weighing heavily on import-dependent countries. To make matters worse, now core global economies are growing aggressively hawkish to recalibrate the inflationary pressures. The recent rate hike by the US Fed is a particularly harrowing prospect. Ironically, monetary tightening by the Fed was highly anticipated to rein in global inflation a few months ago. But now, a bold tightening schedule in the US could kickstart a global recession. Pakistan currently stands as a prime example - a model case study - regarding how the shifting policy outlook amidst severe supply-side pressures could impact the developing economies.
The government of Pakistan has showed a record increase in exports and a steeper-than-expected slump in imports in February. Pakistan managed to curb the current account deficit by $2 billion - whittling to an 8-month low of $545 million in February. Regardless, the changing economic (and geopolitical) landscape around the world, soaring inflation, and swelling commodity markets would naturally obscure the modest economic recovery of Pakistan. While prompt policy measures and strategic decisions could hedge some imminent damage, the adverse impact is almost inevitable, considering the variables at play.
Inflation has been the nexus of economic disruption across the globe. According to the Office of National Statistics, consumer prices in Britain rose by 6.2% year-on-year - the highest rate since March 1992. Even the US faces historic CPI inflation of 7.9% for 12 months through February. Naturally, Pakistan is no different in the world, struggling with searing inflation. Pakistan faces a daunting aggregate demand against abrupt supply shortfalls - pushing to record-high inflation of 13% in January. Note that these figures - albeit worrisome - pertain to a global economy predating the ripples cast by the Russian invasion of Ukraine in late February. The roaring international energy and commodity markets are not accounted for in the statistics discussed. Imagine the repercussions to follow given the already fragile condition of the global economy recouping from the pandemic.
It is no surprise that Pakistan is highly dependent on imported fuel. In just the first eight months of the current fiscal year, Pakistan’s import of petroleum products has already jumped by 100% compared to the corresponding period of the preceding fiscal year. Some impetus might base on the growing demand for electricity as the economy returns to pre-pandemic industrial productivity. However, the inflating import bill is predominantly due to the sharp deterioration in the value of the rupee - rupee-dollar parity plunging to a record low of 181.5 in March. Since core sectors of the national economy - particularly the airline industry and the energy sector - are increasingly dependent on imported fuel, the demand is price inelastic in nature. This contributes to this unprecedented increase in the import bill of petroleum. Unfortunately, the real problem arises now.