A hacker posted a tweet from the official official of the Pakistani Embassy in Belgrade on Friday, claiming government officials had not been paid for three months amid soaring inflation, and mocked the prime minister Imran Khan if it was “Naya Pakistan” he had promised. The Foreign Ministry in Islamabad said the claim in the tweet was “baseless and non-factual.”

Pakistan’s GDP growth is expected to peak at 5% in four years in the fiscal year ending June 2022. At the same time, heightened inflationary risks and a looming balance of payments crisis are putting the country on the brink of collapse external debt bailouts in order to stay afloat.

Forex and currency crises

Pakistan has repeatedly experienced macroeconomic crises: galloping inflation, current and trade deficits, depletion of foreign exchange reserves and currency devaluations. He is again faced with a combination of these problems.

The two immediate threats to the country’s $ 263 billion economy come from mounting inflationary pressures and a payments crisis that stems from a combination of global and domestic factors – problems that the pandemic has exacerbated. The situation is similar and worse than the crisis of 2018, when Pakistan’s foreign exchange reserves fell to their lowest in several years.

As of November 19, Pakistan’s total liquid foreign exchange reserves stood at $ 22.773 billion, according to the State Bank of Pakistan (SBP), the country’s central bank. Of this amount, $ 16.254 billion was held by the SBP; the rest belonged to commercial banks. SBP reserves declined by $ 691 million in the week ended Nov. 19, mainly due to external debt repayments, Geo News reported.

Pakistan’s annual economic growth in calendar year 2018 was 5.8%, but fell to 0.99% a year later and then to 0.53% in 2020, according to the World Bank. This has led to a build-up of current account deficit – which captures the difference between a country’s imports and exports of goods and services, and includes net transfers such as foreign aid, over a period of time.

A persistent high deficit can potentially lead to an oversupply of a country’s currency in its foreign exchange market, which ends up negatively impacting the value of the currency – this is one reason why the Pakistani rupee is in free fall.

Source: Asia Development Outlook, AfDB

The IMF bailout

As growth declined and debt service obligations increased, the country, as on several occasions in the past, faced a potential balance of payments crisis. A BoP crisis is triggered when a country is unable to finance its import bills or service its external debt. Pakistan imports most of the domestic consumption items, making it more vulnerable to these pressures; the increase in debt service obligations added to the pressure.

In 2019, Pakistan asked the IMF for a lifeline, as it has done 13 times in the past four decades. In return for funding of $ 6 billion, Pakistan had to embark on structural reforms and reduce public debt. But the financing plan stalled earlier this year on issues related to reform commitments, and an agreement could not be reached until November 22.

“Pakistani authorities and staff have reached a staff level agreement on the policies and reforms needed to complete the sixth review,” the IMF said in a statement on the day. Upon completion of the review, 750 million IMF Special Drawing Rights (about $ 1 billion) will be available for Pakistan, bringing total disbursements to about $ 3 billion.

On the same day, Shaukat Tarin, who is the equivalent of the Pakistani Minister of Finance, pledged to take four other actions: the withdrawal of tax exemptions and subsidies, an increase in levies on petroleum products, electricity and an audit of some $ 1.4 billion in “extra funds” loaned to Pakistan in April 2020 for the pandemic.

Pakistani government bonds reacted on the day the deal was finalized, jumping 1.3 to 2.8 cents against the US dollar, their best day in more than a year, according to Reuters data.

Saudi agreement

On November 27, Pakistan reportedly obtained a $ 3 billion loan from Saudi Arabia as its cabinet approved a deal to keep the amount at the central bank, local media reported. As of November 2018, Pakistan had taken out a loan of $ 3 billion, of which about $ 1 billion was reportedly disbursed.

Under the new deal, the Saudi government’s $ 3 billion would remain in the SBP’s deposit account for a year, Geo News reported. He quoted Muzammil Aslam, spokesperson for the prime minister’s financial adviser, as saying that Pakistan expected to get $ 7 billion from three sources over the next 60 days, including $ 3 billion from deposits from Arabia. Arabia, a $ 1.2 billion Saudi oil facility with deferred payments, an $ 800 million oil facility from the Islamic Development Bank. All of these inflows of dollars, he said, would be enough to ease the pressure on the country’s import bills. But the loan deal with Saudi Arabia comes with extremely strict terms, including record interest rates of nearly 4%, nearly draconian default covenants, and restrictions on legal remedies Pakistan will have against any. Saudi claim.

Inflation surge

Record inflation in Pakistan is pushing up the prices of basic necessities amid growing threats of unrest, media say. Headline inflation reached 11.5% in November, down from 9.2% in October.

Annual food inflation has been in double digits most months since mid-2019, reaching 23.6% in January 2020, 17.8% in July 2020 and 15.9% in April 2021, according to the Bank of State of Pakistan cited by a November 17 World Bank document. November marked a double-digit return.

According to the President of the Consumers Association of Pakistan, Kaukab Iqbal: “Rising prices of food products, especially fresh fruits, milk and chicken, are having a major impact on livelihoods and nutrition levels. of all families. But much of the burden of this falls on the poor, as rising prices put foods rich in protein and vitamins beyond their reach. “

While inflation is also driven by global commodity prices, regressive domestic policies have not helped matters either, with Islamabad having “systematically penalized the production of high-value products by focusing support on wheat and sugar cane ”, according to the World Bank document drafted by Daud. Khan, Namash Nazar and Willem Janssen. As a result, Pakistan remains an importer of horticultural products, dairy products despite massive numbers of animals producing below its potential, and cotton to feed the domestic textile industry, the authors noted.

Regarding the balance of payments, Pakistan’s current account deficits in September and October were much larger than expected, reflecting both rising oil and commodity prices and improving domestic demand. . The burden of adjusting to these external pressures, as noted by the SBP’s monetary policy statement in November, fell largely on the rupee. The balance of risks shifted from growth to inflation and the current account faster than expected.

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Look ahead

Pakistan is expected to grow by around 5% in the 2021-22 fiscal year (July-June annual cycle), SPB Governor Reza Baqir told CNBC on November 24. even non-energy imports into Pakistan, ”he said.

In September, Fitch Solutions was forecasting growth of 4.2% for the year ending July 22, well below Baqir’s estimate. His claims are also more optimistic than the government’s target of 4.8%.

On November 24, the SBP raised its key rate by 150 basis points to 8.75%, stating that “risks related to inflation and the balance of payments have increased as growth prospects continue to decline. ‘to improve{. The bank also increased the liquidity reserve requirement for commercial banks by a percentage point, the first of its kind in more than a decade.

But Baqir said the government must do more to reduce inflation, including actions to ensure “there is no hoarding or speculation in commodity prices.”