Saba Javed

Pakistan needs to continue with the fiscal consolidation measures and carry out deep structural reforms on a war footing to foster long-term macroeconomic stability to uplift the lives of teeming millions. This was stated by Malik Saqib Ali, head of the economics department at the National University of Modern Languages, Islamabad.

He said the government had already implemented administrative measures to achieve fiscal consolidation, including tight monetary policy, but these measures had led to economic slowdown, rising inflation and drying up of investments. He said the private sector was particularly feeling the pinch due to import and dollar outflow controls and higher borrowing costs.

Saqib Ali said the narrower current account deficit (CAD) achieved during the ongoing financial year was led by a smaller trade deficit (goods and services), and the decline in the trade deficit was due to a significant decrease in imports. “The decrease in CAD occurred due to the administrative measures taken by the authorities to restrict imports by imposing curbs on opening letters of credit (LCs) by the banks.”

He said that CAD was expected to decline further in the remainder of FY23 due to policy tightening and administrative controls, but external gross financing needs would remain elevated. He elaborated that in the financial years 2023-24 and 2024-25, CAD was expected to increase marginally as import restrictions are gradually lifted. “The reserves position is expected to gradually improve as inflows are expected to pick pace in the coming years,” he predicted.

The economic expert said the fiscal consolidation measures like the withdrawal of energy subsidies and removal of restrictions on exchange rate had helped narrow down trade imbalances, but foreign exchange reserves still continued to be at very low levels amid high inflation and sagging private sector activity.

Saqib Ali suggested to achieve long-term macroeconomic stability, and restore consumer and investor confidence in its policies, the government would have to carry out deep structural reforms. It is to be noted here that persistent political and economic instability has led to a steady fall in the foreign exchange reserves of the country. The foreign exchange reserves of Pakistan declined from $11.1 billion at end of FY22 to $5.4 billion on March 10, 2023. Low levels of reserves have contributed to a 27.9% depreciation of the Pakistani rupee versus the US dollar between July 2022 to March 2023.

According to the World Bank statistics, CAD narrowed to $3.6 billion during 1HFY23, posting a decrease of 60.9% year-on-year from $9.1 billion in 1HFY22. In January and February 2023, the current account recorded a deficit of $0.23 billion and $0.07 billion, respectively. Additionally, the goods and services trade deficit decreased by 32% year-on-year from $23 billion in 1HFY22 to $15.6 billion in 1HFY23.

Credit: Independent News Pakistan-WealthPk