Money Matters

Troubled economy

Muhammad Sheroz Khan Lodhi

Troubled economy

The government has been desperately trying to come to an agreement with the International Monetary Fund (IMF) to restart a $6.5 billion loan programme that has been basically stopped since last November in order to keep the economy afloat. For the release of a $1.1 billion installment, the IMF has made a number of conditions, including the liberalization of the currency rate, the elimination of subsidies in various industries, and an increase in taxes. The crisis also has a substantial external component, as evidenced by the significant increase in global food and gasoline costs following Russia’s war in Ukraine.

However, the government has been bogged down in partisan politics, and the International Monetary Fund’s (IMF) $1.1 billion loan tranche has yet to be released since Islamabad has resisted the IMF’s requirements. The government has now turned to small-scale solutions that fall short of solving the issue, like banning imports and early mall and wedding hall closures. The economy undoubtedly needs the funds because its existing foreign exchange reserves only barely cover 18 days’ worth of imports. But, there is still a difficult journey in front of us. We’re expecting fiscal and monetary austerity to continue well into 2024.

The increase in food prices contributed to Pakistan’s weekly inflation rate, which in the previous week reached a 24-week high of 41.52 percent on an annual basis as the nation executed an action plan suggested by the International Monetary Fund (IMF) to restart a stalled loan programme. The Sensitive Price Index (SPI), which tracks weekly inflation, showed an increase of 2.78 percent up until February 23rd, according to the Pakistan Bureau of Statistics, with significant rises in food costs. Bananas saw the largest weekly price increase at 6.67 percent, followed by chicken at 5.27 percent, sugar at 3.37 percent, and five-liter cooking oil at 3.07 percent.

However, financial experts said inflation would escalate further as Pakistan tried to implement prior actions to revive the $7 billion IMF loan facility. Due to the overall macro inflation impact on the economy, as always, the most vulnerable segments of the society will be hit the hardest. The government must focus on reducing price volatility and instead of taking cosmetic measures of ‘price controls’, which never work, should work on war footing to streamline supply chains so that there are no shortages as well as ensure social safety nets for the vulnerable are robust.

For Pakistan to emerge from its crisis, an investment of more than $9 billion will be required. But a lot of it ought to come from personal resources. The purpose of IMF funding is to act as a stopgap, restoring confidence in a way that enables the resumption of private flows. Yet, we also don’t have a good track record with IMF bailouts, so adding more money might not be that helpful on its own. If there is any improvement, it will happen extremely gradually.

There is simply no quick remedy. The lower rupee, which is at record lows, is contributing to imported inflation, and it is anticipated that domestic inflation will remain high due to high energy costs brought on by tariff rises and still-high food prices. During the year 2023, Moody’s predicts GDP growth of about 2.1 percent. It is likely that our country will continue to tighten its monetary policy in an effort to control inflation. Also, given the instability in the foreign exchange market, they may try to intervene there in an effort to impose stability, but this is not going to be a panacea. With our nation experiencing substantial recession-like conditions, rising borrowing costs might seriously worsen problems with domestic demand. We really need to see sustained sound macroeconomic management, and just injecting further funds in there without decent backing is not going to deliver the results that we’re looking for.

First and foremost, IMF funds would aid Pakistan in preventing a default on its international debt, which may have grave repercussions for both its people and its economy. In this way, replenishing foreign reserves is essential. The recovery from the floods will also be helped by aid programmes, but this will be much easier to handle if Pakistan’s reserves increase to levels that give people confidence in the country’s ability to pay its debts.

The writer is an economic analyst