It is no secret that the world is passing through one of its most tumultuous phases in recent memory, both on the political and economic spectrum.
To some extent, the world is still reeling from the effects of COVID-19, the worst global pandemic this century. Although the situation has improved considerably since the outbreak, its economic impact continues to bite as the coronavirus-led slowdown now gives way to supply chain issues, which have not normalised to date.
Adding flame to the fire is the ongoing Russia-Ukraine conflict that has not only led to human losses but sparked a chain of events that has further crippled the global economy. Embargoes imposed by the West on Russia have done little to deter the former superpower from carrying out its onslaught, which has increased prices of energy commodities to the extent that even financially-sound countries are panicking.
The crisis has also led to a shortage of grain, resulting in high food prices and contributing to the world's food crisis.
As the situation remains grim all over the world, tensions are mounting between the United States and China.
However, the situation has been worse for developing economies, including Pakistan.
The South Asian country - home to over 220 million - has been engulfed in multiple dilemmas, including dwindling reserves, mounting debt payments, double-digit inflation and an overall sense of uncertainty, which has left policymakers and businessmen scratching their heads.
The extent of volatility plaguing Pakistan's economy can be seen simply through the very fluctuation of the Pakistani rupee against the US dollar over the course of the last few months.
The local currency, which began 2022 at Rs176.51 against the USD, endured a hammering to reach 239.94 in the inter-bank market after its worst monthly performance in July in over 50 years.
However, as of last week, the currency has since seen a slight revival.
On Wednesday, the Pakistani rupee witnessed a massive recovery as the local currency registered its highest day-on-day increase against the US dollar in absolute terms to appreciate Rs9.58 or 4.19%.
The rupee continued to gain momentum and settled just above the 224 level against the greenback in its last trading session. That translates into an appreciation of Rs15.9 or 7.1% recorded in its last six trading sessions.
The improvement in the currency has less to do with any good news of an increase in dollar inflows but more to do with the International Monetary Fund's (IMF) latest announcement, which confirmed that Pakistan had completed the last prior action for the combined seventh and eighth review.
Furthermore, government's actions to curb imports by banning the purchase of several items have also helped ease payment pressure.
Federal Minister for Finance and Revenue Miftah Ismail said that the government will continue its policy of reducing imports for at least the next three months despite the risk of a slower growth rate.
On the other hand, despite the recent improvement of currency parity in the currency market, it seems enough damage has already been done to the economy.
The dollar has gotten way too strong, especially for the local industry, which remains highly dependent on imports, and faces an ever-rising increase in the cost of doing business.
The Pakistan auto sector, for example, has emerged as one of the most affected parties.
Automakers such as Suzuki, Toyota, Kia, and Hyundai have massively hiked their car rates, citing persistent depreciation of the local currency.
Similarly, the construction sector has also witnessed the impact of currency devaluation.
The average cement price has crossed Rs1,000 a bag, leading to lower local off-take and even a slowdown in cement exports.
As per the data released by the All Pakistan Cement Manufacturers Association (APCMA), cement dispatches during the first month of the current financial year 2022-23 declined by 47.7%, and total cement dispatches during July 2022 were registered at 2.039 million tons against 3.899 million tons during the same month of the corresponding financial year.
Along with cement, steel prices too, have ballooned due to uncontrollable rupee depreciation resulting in higher import costs.
Other economic indicators also do not paint a rosy picture. Pakistan's imports declined by 37.7% in July 2022, clocking in at $4.913 billion compared to $7.880 billion in June 2022, but the country's exports registered a decline of 24% in July 2022 and remained at $2.219 billion as well.
The drop in exports comes despite an undervalued rupee, with a real effective exchange rate of 93.7 in May 2022, as per provisional estimates. It reflects that a weak rupee does not necessarily translate into higher exports.
Moreover, government efforts to halt the outflow of dollars have remained futile. Foreign exchange reserves held by the State Bank of Pakistan (SBP) stood at an alarming level of $8.39 billion, as per the latest figures. This low level of reserve position could cause severe pressure on the currency in the coming days.
There is hence, a need to introduce much-needed structural reforms, while emphasis should be on delivering value-added products to attract better export value.
Furthermore, down the road, the government should lower its dependency on external borrowing to pay off its past liabilities and adopt frugal measures in order to curb its expenses, which would require some sacrifice from the government's end.
Without that, the cycle of one crisis after another is likely to continue.
The article does not necessarily reflect the opinion of Business Recorder or its owners
The writer is a Senior Sub Editor at Business Recorder (Digital)
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