A Catch-22 Situation
Lying on the brink of sovereign default, Pakistan needs to devise a long-term strategy to ensure that the economy escapes from the clutches of this perpetual challenge.
Pakistan is once again on the brink of default. After Lebanon, Sri Lanka, Russia, Suriname and Zambia, Pakistan is another country where the risks of economic default are significantly high as rising borrowing costs, inflation and debt all stoke fears of economic collapse. Finance Minister Ishaq Dar believes Pakistan will not default on any of the international payments as Pakistan’s one year probability of default is merely 10% as opposed to what he regards as a highly dubious number of 93%. Former (PML-N) finance minister Miftah Ismail, in stark contrast, says Pakistan’s default risk won’t vanish even after the December bonds are paid off. As the two finance ministers of PMLN face-off, the economic policymakers need to come up with a strategy to avoid default and ensure that the economy escapes from the clutches of this perpetual challenge.
Whenever the threat of a balance of payment crisis looms in the country, the first steps taken by the policymakers is to limit imports by imposing restrictions on various imports, consequently increasing the price of the imported goods into the country that further fuels inflation. Borrowing data from the State Bank of Pakistan (SBP), the current account deficit in the first four months of FY23 was $2.8 billion, decreasing from $5.3 billion reported for the same period in FY22. Export receipts have increased marginally by $250 million, while import payments have decreased drastically by $2.7 billion. The trade deficit reported by the SBP was $3 billion less in the first four months of FY23 than in FY22. With the threat of default still looming in December 2022, it is likely that the government may increase the intensity of the import restrictions as consumers and importers face increasing constraints in making payments to foreign vendors and sellers. This may further reduce the trade deficit, which was at approximately $40 billion in FY22. This increased from $28.6 billion in FY21, a year when trade was massively hit by the COVID-19 pandemic. The current account deficit, on the other hand, increased from $2.8 billion in FY21 to $17.4 billion in FY22. The current account deficit in October 2022 was reported at $567 million, down from $1.8 billion in October 2021. It is quite evident that import restrictions are squeezing the import payments. However, such measures can create shortages in the economy, particularly in the production of import-dependent essential goods.
Given that many industries depend on the imports of intermediate goods and raw materials to produce essential goods for the domestic market, the fall in imports has a significant impact on the local economy as it curtails the ability of domestic producers to meet their supply. It further adds to the challenges as it reduces the ability of domestic businesses to generate employment. The overall business confidence reported in the Business Confidence Survey, carried out by the State Bank of Pakistan in collaboration with the Institute of Business Administration, Karachi, reports low levels of confidence in the business community on the economic conditions prevailing in the country. The current capacity utilization in the industrial sector was at 63.6% in October 2022, decreasing from 72.2% in October 2021. The indicator on current employment was at 48.4 as businesses feel that they are unlikely to create jobs in the prevalent economic environment. Given the high rates of import dependency, it is likely that import restrictions imposed as a result of the impeding balance of payment crisis this year has adversely impacted domestic production in the country. The import payments on machinery into Pakistan have decreased by more than $1 billion year-on-year in the first four months of FY23 as importers report significant constraints. On the other hand, the import payments on the petroleum group have increased by more than $2 billion in the first four months of FY23. Imports of raw and intermediate textile products have also decreased, which indicates a likely decline in the production of textile products.
PAS Holds Annual General Meeting
A LAND WITH NO JOY
The Book ‘Gambit on the Devil’s Chessboard’ Launched
Pakistan Advertising Association Appoints Executive Director
Book on Taxation Launched
Netflix Documentary on Harry, Meghan Backfires
‘Wednesday’ Star Shines on Instagram
Nestlé, WWF Partners on Sustainability Training Session for Kids
LADY GAGA, THE MOTHER MONSTER!
Open House brings students’ performances to the fore