Pakistan Economy_The perfect storm, (AKD Daily, May 24, 2022)
The perfect storm
The country finds itself on the cusp of yet another economic crisis. Soaring trade deficit amid commodity super cycle, poor policy management and huge external debt repay-ments have put significant pressure on the currency which has been exacerbated by strong USD amid course correction by the US FED, as the world’s largest economy itself faces a battle against inflation.
The economic crisis gets further compounded by the political strife between the govern-ment and the opposition after the former PM, Imran Khan, was ousted from the office. Political tension in the country has remained high since his removal in early April, and is set to rise further, after the, now ousted PM Imran Khan, gave a call for a protest march to capital later this month.
The internal political uncertainty, coupled with the political costs associated with taking difficult economic decisions has blunted any impulse for meaningful course correction from the current administration and have resulted in a policy paralysis of sorts. Unwill-ingness, or inability, by the GoP to reverse the legacy fuel and electricity subsidies of the previous government will likely create difficulties in negotiations with the IMF.
Given the current economic situation, the country needs tough policy making on war footings in order to stay afloat. However, the current policy paralysis is expected to drag the negotiations with IMF while the FX hemorrhage will likely continue. IMF’s agreement will help unlock further flows from bilateral sources. Conversely, a delay in agreement coupled with the quantum of debt servicing lined up, the country may face issues.
Inadequate steps have been taken so far in order to ease the pressure on the current account where the duties on various luxury items were raised recently and SBP increased the interest rates by another 150bps yesterday. However, these measures are expected to fall short in order to address the current challenges faced by the economy.
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