Pakistan’s leadership may be feeling good about staving off an immediate economic crisis through the $6 billion IMF bailout but Pakistan’s economic problems are structural and this will not resolve them.
On Monday, the State Bank of Pakistan raised its policy rate by 150 basis points to 12.25 per cent citing rising inflation as well as “expectations of future inflation driven by a weak rupee, widening fiscal deficit and potential adjustments to the utility tariffs.”
According to the monetary policy statement issued, “The [IMF] program is designed to restore macroeconomic stability and support sustainable economic growth, and is expected to unlock considerable additional external financing. Inflation is expected to be in the range of 6.5pc to 7.5pc in the current financial year and it is anticipated to be considerably higher in fiscal year 2020. Inflation outlook is subject to a number of upside risks from an expected rationalisation of taxes in the upcoming budget, potential adjustments in electricity and gas tariffs, and volatility in international oil prices. The bank stated: “In addition, a greater reliance on central bank financing of the deficit has acted to dilute the impact of previous monetary tightening … The resulting increase in monetisation of the deficit has added to inflationary pressures.”
According to a detailed report in Dawn, “Inflation eased from 9.41pc in March — the highest in five years — to 8.8pc in April. Average inflation reached 7pc in July-April fiscal year 2019, compared to 3.8pc in the same period last year. The decline in the rupee’s value during the past two weeks and the lagged impact of previous bouts of depreciation pushed the prices of almost all essential items including flour, dates, meat, fruit etc during Ramazan.”
Further, “The SBP’s financing of the fiscal deficit resulted in increase of printed money leading to further inflationary pressures, said the monetary policy statement. The government had borrowed Rs4.8 trillion from the SBP during the ongoing fiscal year, 2.4 times higher than the same period last year, as it is expected to book a considerably higher fiscal deficit during the first three quarters of the current fiscal year due to a decline in revenue collection, increase in security-related expenditures and higher interest-related payments. On the external front, the current account deficit narrowed by $4 billion to $9.6bn during the July-March period but financing challenges rose despite significant bilateral inflows. “The reduction is mainly driven by import compression and a healthy growth in workers’ remittances. [However,] this impact was partially offset by higher international oil prices. The non-oil trade deficit declined from $13.7bn in July-March FY18 to $11bn in the first nine months of 2018-19 reflecting the impact of stabilisation policies implemented so far,” the SBP policy statement explained. Pakistan’s foreign exchange reserves have already fallen to $8.8bn — enough to cover three months of imports — despite bilateral inflows from China, Saudi Arabia and the UAE. “Despite improvement in the current account and a noticeable increase in official bilateral inflows, the financing of the current account deficit remains challenging,” the SBP pointed out. The recent exchange rate fluctuation reflects the underlying pressures on the local currency that has depreciated by 5.9pc since the last monetary policy announcement hitting record low of Rs150 against the greenback last week.”