FY2023: An auspicious start

Around mid-July, Pak-istan witnessed most volatile conditions in the forex market. Political turmoil, delays in policy decisions and deferral of the IMF Board meeting caused panic in the market, which was exacerbated by speculation and market manipulation.

The fact that this was not related to economy’s fundamentals, as we argued in our previous article (BR: 27-7-2022), is now quite evident. The data for July 2022 is heartening. The import bill, our nemesis during the last fiscal year, has substantially reduced though more needs to be done, and there are signs we would see more reduction going forward.

Against a monthly import of $6.7 billion during last fiscal year, imports in July 2022 came down to $4.8 billion. Relative to last June, which saw the second highest imports in the year of $7.8 billion, it was down by 38% reduction. However, it was down by 21% relative to imports of July 2021. Exports averaged $2.7 billion per month during last fiscal year. In July 2022, exports amounted to $2.2 billion. Exports were down by 24% relative to June while they were down only by 5% relative to July 2021.

We should view the recent recovery in both forex and stocks markets in this background. There were other news also, such as a statement from the IMF and the COAS reaching out to the USA, UAE and KSA with a view to impressing upon them the need for early release of IMF tranche.

How much can we be confident if the incipient recovery is sustainable? For one thing we may be sure that the external environment is improving. The commodity prices are declining for almost all commodities. Consider, the prices of sugar, wheat, rice, tea, palm oil, soyabean oil, DAP and urea fertilizers.

Except for the price of tea, which rose by 12%, all other prices were lower in July compared to June, and the decline ranging from 30% (palm oil) to 3.6% (wheat) with no change in the price of DAP which in June had declined by 7%.

In fact, the oil price is further down in the first week of August as it was trading at $95 on Friday. The declining trend was set a few months ago. The FAO Food Price Index averaged 140.9 points in July, down 8.6 percent from June, marking the fourth consecutive monthly decline since hitting all-time highs earlier in the year. The Index, nevertheless, remained 13.1 percent higher than in July 2021.

The recent announcement from the central bank reversing the 100% cash margin requirement on LCs and lowering it to 25% is an encouraging sign that the central bank is viewing recent developments with confidence and is therefore loosening the regulations to encourage trade.

However, a more significant pointer for improving global environment is the global slow-down, which has led IMF to cut down its growth outlook from 6.1% for the last year to 3.2% in this year. It is good for us because the downward trend in commodity prices is the result of perceived reduction in global demand for commodities, most significantly the oil.

Our dependence on imported energy is the Achilles’ heel of our economy. Undoubtedly, our exports would be affected adversely but in a stabilization phase reduction in exports earnings would be more than compensated by the savings in import costs.

This phenomenon happened in the 2014-16 period when oil prices crashed in the international market, leading to a major reduction in oil import bill while exports also declined. Even though the decline began in November, petroleum bill for 2014-15 was down from $14.8 billion in 2013-14 to $12.3 billion, a difference of $2.5 billion or a decrease of 17%, and was further down to $8.3 billion in 2015-16.

Exports were down by $1 billion in 2014-15 and further declined by $2 billion in 2015-16. Thus in two years, against a saving of $9 billion in the form of reduced petroleum bill, our loss of exports amounted to $3 billion. Last year, our macroeconomic framework unraveled because our imports shot up to $80 billion, an increase of 42%, but petroleum bill increased by 106% from $11.3 billion to $23.3 billion. We conclude that these price trends are promising at least for the near future.

Two other promising signs are due to the Acting Governor of SBP. First, in a press interview a few days ago, he dispelled the speculation that in the light of the inflation figure of July, a further action on policy rate was warranted. He was emphatic in saying that Pakistan should not risk recession by pursuing a policy of inflation-adjusted positive interest rate.

This is a bold statement and a break from those who advocate mechanical inflation targeting based on headline inflation. We have seen leading central banks (USA and UK) making measured increases much below the rising headline inflation.

They are being heavily criticized for doing so for triggering recessionary expectations in the market. He said the high headline inflation was due to delay in price adjustments, if they were effected on time this spike would not have seen. Thus going forward the inflation would decline and create room for positive real interest rates.

Second, an important disclosure has been made by the acting Governor that the financing gap of $4 billion for the current fiscal year has been closed, which the IMF had alluded to while acknowledging the completion of prior actions. This essentially means that the requisite assurances as desired by IMF from friendly countries have been received. This would further enhance market confidence for the release of IMF tranche.

We, however, have an apprehension from economic managers which may derail this promising recovery. Even though the elections are not due until next October 2023, if held on time, effectively this is the last fiscal year before election. Country’s history is replete with fiscal indiscipline practiced in the closing years of the government.

After successfully concluding the IMF programme during the 2013-16 period, the PML-N government could not sustain the momentum of reforms as it ended up incurring in its last year a fiscal deficit of 6.6% of GDP and highest current account deficit of more than $19 billion or nearly 6% of GDP. If anything like this happens, then we would not have the external environment to blame as it would be nothing but a self-inflicted injury.

(The writer is a former finance secretary, government of Pakistan)

Copyright Business Recorder, 2022