Emerging economic stability

The balance of payments (BOP) for the first quarter Jul-Sep is encouraging for the stability of the economy. There are other developments also which strengthen this view.

The third month of the fiscal year has shown perhaps the strongest sign of economic stabilization. The imports (fob) in September have come down to $4,822 million compared to $6,057 million for September 2021, showing a decrease of 20%. It also decreased by 17% compared to August 2022 when imports amounted to $5,848 million.

On a quarterly basis, imports amounted to $16,018 million compared to $17,395 million last year, showing a decrease of 11%. If imports are contained below $5 billion for the next 8 months of the fiscal year, the country would sail through its difficulties this year.

During the quarter exports (fob) have registered a good performance though monthly performance shows deceleration. Exports during Jul-Sep amounted to $7,594 million compared to $7,201 million last year, showing an increase of about 6%.

Exports in September 2022, however, amounted to $2,501 million compared to $2,627 million last year, which is a 5% decline, and $2,813 in August 2022, which is down by 11%. In our assessment, given the accelerating headwinds of global recession, if the exports can hold on to last year’s level it would be a heroic effort.

Not surprisingly, the trade account is showing a very strong improvement. From $10,194 million in first quarter last year, the trade balance has declined to $8,424 million, showing a decrease of 17%. On the services side, overall position has suffered a little as remittances fell from $8,199 million to $7,685 million showing a decline of 6%. We believe this is a temporary fall not related to weakening global demand, since the countries of largest remittances are benefiting from present economic conditions.

Undoubtedly, the policies pursued by the government are giving the desired results. In Jul-Sep 2022, the current account deficit (CAD) came down to $316 million as opposed to $1,152 million, down by nearly 68%. Relative to July and August, when CAD was recorded at $1,215 million and $676 million, it has also declined significantly.

The capital account, not surprisingly, has been under stress. Net foreign direct investment declined from the paltry number of $418 million to $157 million while other capital inflows declined substantially from $4,364 million to a meager $254 million. This is indicative of the large debt retirement as foreign reserves declined $19.4 billion to $8.1 billion as on 30-9-2022 relative to last year. Of course a more durable resolution of economic crisis would be possible after rebuilding buffers of foreign reserves which are critically needed for facing any new shocks.

The large scale manufacturing data for two months July and August is now available. The LSM output increased by 0.6% for August, 2022 when compared with August, 2021 and 3.9% when compared with July 2022. July was negative 16% and therefore this reflects base effect. Overall LSM Sector has shown a decline of 0.4% during July-August 2022-23 when compared with the same period of last year. This development is the result of austerity that required slowing down the demand. There is a broad-based decline in some critical industries such as textiles, food, beverages, cement, pharmaceutical and automobiles.

There is another key development. After touching nearly Rs.240/$ in the interbank on 23-10-2022, rupee had regained nearly 10% of its lost value when it touched Rs.217/$ on 11-10-2022. Since then, rupee has retreated but has oscillated around Rs.220/$. Here again it is difficult to see how the exchange rate would play out going forward. The approval of $1.5 billion by ADB (Asian Development Bank), which will be piggybacked to the extent of $500 million by AIIB (Asian Infrastructure Investment Bank), and then followed by WB (World Bank) in the second half, would help stabilize rupee and build reserves also.

The Finance Minister’s visit to Washington has given a wide window on government economic policies and future plans. He made four important announcements: (i) the government would not be seeking any concessions from the Fund for remaining reviews; (ii) Pakistan would not be seeking rescheduling of its Paris Club debt; (iii) Pakistan would be retiring its maturing Sukuk of $1 billion in December; and (iv) Pakistan would seek some relief on bilateral debt from China and other friendly countries.

These messages should be a source of comfort for the markets both here and abroad. It shows government’s resolve to stay the course on the reforms agreed with the IMF. It should also help silence those voices that persistently predict a default by Pakistan.

Prices continue to remain under pressure. Since the week of 15 September, when the y-o-y weekly inflation in sensitive price index was 41%, the index has moderated in the highs of 20s, and during the week ended on 20-10-2022 it recorded an inflation of 27%. As would be recalled, a great deal of deceleration in prices owes to a single decision of the government waiving the fuel price adjustment (FAP) for the users of up to 300 kwh, which was an unprecedented hike.

How this would be finally recovered from consumers is not known. The expected decline in international oil prices has again been held up after the OPEC+ decided to cut the output by 2 million barrels per day. Therefore, it cannot be predicted, at least during this year, when the inflation would credibly decline.

Another good news for Pakistan was its removal from the FATF’s ‘grey list’. This has been a truly heroic feat the country has achieved. It was February 2018 when in an orchestrated move Pakistan was not only placed on the ‘grey list’ but was passed on to International Cooperation Review Group (ICRG) for evaluation of its AML/CFT regime as opposed to Asia Pacific Group (APG) which looks after Pakistan. ICRG had literally washed away all that we had done in the previous 8 years and then developed a towering reform agenda of 34 Recommendations.

Mercifully, Pakistan disregarded the motives behind such a move and instead devoted wholeheartedly to achieve this unprecedented agenda. After more than four year we proved wrong those who thought we would fail and then they would push us to the ‘black list’. Federal and provincial governments, aided by Pak Army, deserve all the accolades from the nation for bringing this day in their lives.

Copyright Business Recorder, 2022