Mixed start of FY2023-24

The current financial year, 2023-24, started on a very positive note. The talks with the IMF (International Monetary Fund) were finally successful and Pakistan was given the Stand-By Facility of $3 billion for nine months.

The first installment of the loan of $1.2 billion was released in mid-July. Saudi Arabia and the UAE made deposits with the SBP (State Bank of Pakistan), following the agreement with the IMF, of $2 billion and $1 billion, respectively.

Consequently, the foreign exchange reserves of the SBP nearly doubled in mid-July to over $8.7 billion, as compared to only $4.4 billion at the end of June. There was a rise in confidence in different markets. The rupee’s value with respect to the US dollar went up by over 3% and the KSE-100 Index rose sharply by almost 18%. There was a general perception that Pakistan had averted default at least during the tenure of the Stand-by facility.

The last three weeks have, however, witnessed a spate of not so good news. The first such news was regarding the rate of inflation in July. The PBS reported it at 28.3%, only marginally below that in June of 29.4% and significantly above the rate of inflation in July 2022 of 24.9%.

The Ministry of Finance had projected in the budget documents of 2023-24 the inflation rate at 21%, much below the rate in 2022-23 of 29.2%. Similarly, the IMF has projected it at 25.9%. As such, the start with the inflation rate at 28.3% in 2023-24 is worrying.

There are a number of commodities and services which have shown big increases in July. The first item is wheat flour, the staple in peoples’ diet. The price of this item in July is more than double the price in July 2022. The price of rice has also gone up sharply by 69%. Electricity tariffs were raised by almost 40% in July. Earlier, there had been a big increase in gas charges. The end of July also witnessed a significant escalation in the prices of POL products.

There are also some negative developments at the global level in commodity prices. The price of wheat has jumped up following the restrictions on exports by Russia. Similarly, the imposition of quotas has led to a jump in oil prices. Overall, it appears that if the current trends persist then the rate of inflation in 2023-24 could remain close to the exceptionally high level of above 29% in 2022-23.

The other worrying short-term developments are regarding the performance of exports and remittances in July 2023. According to the PBS (Pakistan Bureau of Statistics), exports and remittances have each barely touched $2 billion in the month. This implies that on a year-to-year basis, exports are down by 9% and remittances by over 19%. The latter have declined from all major sources including the UK, USA, Saudi Arabia, and the UAE.

These declines are also in sharp contrast to the optimistic projections by the IMF. Exports and home remittances are expected to average monthly almost $3 billion in 2023-24, 50% higher than the actual level in July.

However, imports have also been exceptionally low, at close to $3.7 billion in July. This is substantially below the average monthly level projected by the IMF of almost $5.5 billion in 2023-24.

The question which arises is whether physical restrictions continue to be placed on imports? This is in violation of the agreement with the IMF in the Stand-By Facility that all restrictions will be withdrawn, and a market-determined exchange rate policy will be followed. This also implies that if the availability of imported raw materials and inputs remains limited with the resulting impact on production, the likelihood of a GDP growth rate of at least 2.5% in 2023-24 will be diminished.

There is another short-term violation of the agreement with the IMF. The measure of market determination of the exchange rate is to be that the difference between the open market and the inter-bank exchange rate should not exceed 1.25%. As of August 10, it is significantly larger at over 3%.

Another area of concern is the performance of FBR revenues in July. The growth rate registered is 16.6%. The FBR revenue target for 2023-24 is based on a much higher growth rate of over 30%. The July collection indicates the risk of a large and rising shortfall unless the import tax base expands sufficiently.

Turning to the monetary indicators, the month of July has seen the emergence of negative trends here also. Credit to the private sector during the month has actually contracted by Rs 172 billion, as compared to an increase of Rs 151 billion in July 2022.

This is beginning to cast doubts about the IMF projection that private investment will rise by almost 13% in real terms in 2023-24. This is, of course, conditional on significant downward movement in interest rates during the year. However, the Monetary Policy Committee has kept the SBP policy rate unchanged at the peak level of 22% in its recent meeting.

Overall, the initially good news at the start of 2023-24 is being replaced by a spate of not so good news on various fronts including inflation, international trade, foreign exchange reserves, tax revenues, private investment, etc.

The new caretaker government will have to move immediately after assumption of office to take the necessary steps to ensure that the performance criteria for end-September 2023 in the IMF Stand-by Facility are fully achieved.

Otherwise, there is the risk of suspension of the Program like the previous one and a return to the loss of confidence in different markets about the prospects for the economy of Pakistan and its ability to honor its due external payments in 2023-24 of almost $25 billion.

Copyright Business Recorder, 2023