Will crisis-hit Pakistan be able to prevent looming recession?

The current account deficit (CAD) of the crisis-hit country shrank 90.2% to USD 0.24 billion in January from USD 2.47 billion in the same month last year, according to the State Bank of Pakistan. 

Pakistan authorities need to do things fast to release the International Monetary Fund (IMF) bailout package lest people would come out on the roads in protest eventually leading to social tension, anarchy, disorder, and uncertainty which would make things further difficult. 

The reduction in the current account deficit was caused by an unprecedented contraction in imports, which reflects almost a standstill in industrial activities, as per ANI reports. 

Many companies across sectors have either suspended operations or scaled down production levels, leading to layoffs. It is felt that the projected GDP growth of 3.5% for Pakistan in the FY 2023-24 would be difficult to realize, reported Asian Lite International.

Dawn reported that the decline in deficit was recorded as import restrictions continue to persist amid a balance of payments crisis that has brought the country on the verge of default. 

Ismail Iqbal Securities’ Head of Research Fahad Rauf said the shrinking current account deficit was “not an achievement but a result of low reserves,” the paper reported.

As per the latest data, Pakistan’s current account deficit during the first seven months of the current fiscal year stood at USD 3.8 billion, which equates to a decline of 67.13% compared to July-January FY 2021-22. As of February 10, the Central Bank had only USD 3.2 billion in reserves, enough to cover barely three weeks of imports.

To stem dollar outflows, the government has imposed restrictions, allowing imports of only essential food items and medicines until a lifeline bailout is agreed upon with the International Monetary Fund (IMF), which is seen as necessary for the country to stave off default, reported Asian Lite International.

Pakistan heavily relies on remittances apart from exports and foreign loans for its foreign exchange reserves. But it is a matter of concern that exports have also declined, clocking in at USD 2.21 billion in January, down 4.29% from the preceding month’s USD 2.31 billion, ANI reported. 

The economic collapse-like situation in Pakistan has arisen due to a combination of factors including economic mismanagement, political uncertainty, natural disasters, galloping inflation, high energy prices, and immediate foreign debt payment obligations.

People are facing surging prices of essential items like wheat flour costing PKR 100/150 per kilogram, milk costing PKR 250 per litre and chicken PKR 780 per kilogram. In contrast, energy prices are going up to all-time high levels due to the removal of subsidies as well as increases in taxes. Such occasions in the past have been fertile for a military takeover, reported Asian Lite International.

Earlier this month, the Pakistan government and the IMF staff concluded the ninth review of the $6.5 billion bailout package without a staff-level agreement. The Pakistani government had hoped that they would be able to convince the IMF about implementing the conditions in a gradual manner. However, Islamabad’s hopes were dashed during the IMF mission’s 10-day visit to Pakistan.

(With ANI inputs)