If you are a macroeconomy observer still shell-shocked from the effects of the disastrous balance of payment crisis of summer 2023, three recent developments should make you pause. First, in its post-MPC briefing last month, SBP noted that non-oil import volume had risen some 30 percent from 2023 rock bottom and is quickly closing in on 2022 peak levels. Second, dollar-based import financing – also known as Foreign Currency Import Financing (FCIF), climbed to its highest level in history in Dec 2024. At $1.63 billion, FCIF outstanding has doubled since 2021. Third, just yesterday, PBS reported the monthly import bill for Dec 2024 at $5.4 billion, the highest since Aug 2022. This is the first time monthly import bills have breached the five-billion-dollar mark in two years per PBS.
Before we take potshots of “told you so!”, a few comments. Those who believe that Pakistan’s economy is still undergoing a slowdown – or even a contraction - must appreciate that no two business cycles look exactly alike. It is true that micro-indicators such as per capita energy consumption or auto-sales that climbed to record levels in 2022 are yet to show significant movement. However many other segments in the real sectors may be witnessing accelerating economic activity. In aggregate, these may eventually deliver a sizable macro-growth number when the fiscal year winds down. No, not a 4-plus percent V-shaped 2021 post-COVID style recovery, but still a decent enough revival that might be branded as “sustainable growth” by the good folks at Q-block.
That growth is finally returning to Pakistan in a “sustainable” fashion would normally be a good thing. But let’s pause a moment. If the December import bill surprise is a sign of things to come, a current account deficit showing up before the end of H2 FY25 is not fearmongering. Two, both import volume and value have normalized at a time when: a) financing cost is still very much in double-digit territory, which represents restrained monetary settings by historical standards; b) BMR or capex is not taking place across industries broadly speaking; also indicated by very low machinery imports; c) surprise elements such as billion dollars plus wheat and soybean imports are not taking place; d) global commodity prices are ultra-low relative to 2022 super cycle; e) lumpy power generation or textile machinery imports are virtually non-existent; auto imports are disincentivized through hostile conditions on car financing (shortened maximum tenor and higher minimum down payment).
Take any of these elements away, and the import bill could shoot up overnight.
That import demand is back to its historic range and the import bill is kept under control due to either regulatory restraints or sanguine commodity prices is not great news. Instead, it implies that the economy could be one shock away from landing back into a foreign exchange crisis. And that shock could come from anywhere: poor wheat crops due to an extreme weather event; global oil prices going off the rails; the Trump administration’s failure to find an off-ramp in negotiations over Ukraine; spillovers from the tariff war between China and the US; or an adverse judgment from the Supreme Court shattering the fragile façade of political stability.
By most metrics, 2025 is supposed to be a better year for Pakistan’s economy. The lasting effects of post-pandemic global inflation of 2021-2024 are finally receding. Interest rates too are easing globally. Trump administration is expected to reach ca ease-fire in both active conflict zones. Global commodity prices are indeed expected to remain sanguine. Consumer demand is also expected to return, as wages play catch up to prices.
However, economies living completely on borrowed FX reserves should not be in the business of betting on economic events and trends outside their control. That Pakistan’s commodity imports are already witnessing a robust rise under adverse monetary conditions means easing too much and too quickly might be the same as inviting disaster.
Already, the impact of 900bps worth of rate cuts delivered in a little over six months is yet to play across the economy. Remember, foreign currency-based import finance is only the tip of the iceberg. The real surge in imports comes from easing conditions on Rupee-based loans, which will start trickling in real soon. The Rs 2.5 trillion worth of ADR loans made to businesses in the corporate sector will also show up on the demand side sooner or later.
The SBP has already delivered the rate reset for Q1-2025 in its last MPC meeting. The macroeconomy is stimulated sufficiently enough. Foreign exchange reserves are still too fragile. If this time is indeed going to be different, it must keep its commitment to maintain ‘sufficiently’ positive real rates on a 12-month forward-looking basis.
Let the effects of the cuts already made play out. Stop buckling under pressure. Stop getting consumed by the adrenaline rush of ‘tezi’. This is the time for pause.
Comments