African Reserves Loans

Economy 2021

The writer heads the Sustainable Development Policy Institute.

The Pakistani economy faces a triple challenge: Internationally, it faces soaring prices of essential commodities such as oil, gas, wheat and sugar and unusually high shipping costs. raised on its foreign trade; at the regional level, it is grappling with the economic and financial fallout from an extremely volatile situation in Afghanistan; and at the national level, it is trying to cope with the declining value of the rupee and the lack of resources to control the prices of electricity, gas and oil.

Therefore, everyone – except the top 20% of incomes who own half of Pakistan’s wealth according to the National Human Development Report released by the United Nations Development Program (UNDP) – is unable to cope with food and energy inflation.

The government is also finding it increasingly difficult to protect populations from economic shocks caused by the combined effect of these three challenges. This despite the fact that he has already taken a hit on his income by lowering the petroleum tax and the general sales tax on fuel.

Before analyzing what else the government can do to mitigate this shock, it is essential to look at the origin of the challenge. Its first component consists of a faster-than-expected recovery of industrial production in major economies in the midst of Covid-19. The increased global appetite for energy and other commodities as a result of this recovery has, in turn, triggered higher fuel prices.

Over the past 12 months, the prices of South African coal, Brent crude and natural gas have increased by 150%, 100% and 500%, respectively. Prices for palm oil, soybean oil, wheat, sugar and fertilizers have also increased, but not on a similar scale.

The impact of high commodity prices was compounded by their high landing costs in Pakistan. And then, the depreciation of the rupee against the US dollar makes Pakistani imports even more expensive.

It is relevant to mention that various other factors are also responsible for the current rise in prices. For example, the prices of perishable foods – vegetables and fruits – are affected by seasonal fluctuations in supply. Likewise, an increase in the minimum support price for wheat in March of this year (Rs 10 per kilogram in Punjab and Rs 15 per kilogram in Sindh) also had an inflationary impact on end consumers.

Weak administrative mechanisms at district and local level is another reason for the price increases. Their weaknesses have widened the gap between wholesale prices (wholesale price index) and retail prices (consumer price index). These poor mechanisms are also responsible for the uncontrolled smuggling of wheat, wheat flour and urea-based fertilizers to Afghanistan, whose economy is reeling from de facto economic and financial sanctions imposed by states. United.

Some reports suggest that US dollars were smuggled from Pakistan to Afghanistan; and that Afghans living in Pakistan are also accumulating large amounts of dollars. All of this increases the pressure on Pakistan’s limited supply of dollars (thus contributing to the depreciation of the rupee).

To be fair to the government, no quick fixes are available for this situation, except the removal / reduction of duties and taxes on the import of essential products. He’s already doing it. But, since a large portion of federal revenue comes from these same duties and taxes, their removal / reduction will certainly increase the budget deficit.

Another solution suggested by many is that the rupee should be strengthened in order to make imports cheaper. This, however, does not work due to two factors: First, the strength or weakness of the rupee is highly dependent on the state of the economy as well as currency inflows and outflows. If economic growth is weak and currency outflows are greater than inflows – as is the case in Pakistan these days – keeping the rupee artificially strong will deplete our meager foreign exchange reserves which we need to meet our needs. current account deficit.

The State Bank of Pakistan (SBP) has about $ 20 billion in reserves. He may sell some of them to improve their market offer and enhance the value of the rupee. But then it will have less foreign exchange left than it needs to pay for essential imports and repay foreign loans. The central bank is rightly inclined towards maintaining its reserves to avoid a balance of payments crisis. The artificially strengthened rupee also subsidizes imports and hurts domestic manufacturing as well as export growth.

The only way to strengthen the rupee without negatively impacting exports and foreign exchange reserves is somehow to increase the supply of dollars. This can be done by increasing export earnings, incentivizing foreign direct investment, guaranteeing foreign loans, and increasing remittances from overseas Pakistanis. While expatriates are sending more and more money home than in the past, there is little to no progress in growing exports and foreign direct investment.

This means that the supply of foreign exchange remains fragile, with any small change in international and regional situations having the potential to completely disrupt it. Consider, for example, the consequence of the massive loss of jobs by Pakistanis in the United Arab Emirates and Saudi Arabia. That alone can have a devastating impact on the influx of remittances. Or imagine the consequences of Pakistan’s failure to secure financial support from the International Monetary Fund (IMF) and / or the World Bank if it is continually seen as not cooperating with the United States on the situation in Afghanistan. In either case, Pakistan’s dollar reserves will come under great pressure and the value of the rupee will fall further instead of strengthening.

The situation in Afghanistan has three major implications for the Pakistani economy. First, given Pakistan’s strained relations with the United States, it remains uncertain whether Pakistan will be graylisted by the Financial Action Task Force (FATF) – the review is scheduled for next month. Second, and for the same reasons, Pakistan should not expect any leniency during the next IMF review and will have to honor all the commitments it made when signing all of the outstanding loans. Third, Pakistan will remain an unattractive destination for foreign investors due to the negative coverage of its security situation in the US media.

So what should the government do? For now, he can only wait and watch. It cannot do anything to offset world commodity prices. There is also little he can do to stop the devaluation of the rupee. The only thing he can really do is do a thorough and realistic analysis of his Afghan policy and then make sure that this policy does not have serious economic consequences.

In addition, he should take action to save people from the devastating effects of rising inflation. This can be done by increasing their livelihood opportunities (by carefully deploying and then scaling up initiatives like the Kamyab Pakistan program). The government should also strengthen their purchasing power through targeted subsidies (using survey data from the National Socio-Economic Register) on energy and food products.

Until then, inflation will continue to be a headache for the people and the government of Pakistan.

Twitter: @abidsuleri

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