Amid plummeting remittances and depleting foreign exchange reserves, Pakistan is on the brink. The country’s policy makers have signaled their intention to adopt unconventional measures.
Recently, Pakistan’s Federal Minister of Planning, Ahsan Iqbal, urged compatriots to reduce their tea consumption to help lower the import bill. He said: “I am appealing to reduce tea consumption by 1-2 cups as we are importing tea on loan.”
The Minister of Planning also revealed that the trading community has also been asked to close the markets at 8:30 p.m. to save energy to reduce the import bill for petroleum products.
The minister’s call to reduce tea consumption was not well received as the exchange of views on Twitter revealed.
Import of tea forms a significant component of Pakistan’s total import bill, which stood at $400 million in 2021-22 and $340 million in 2020-21.
Such calls reflect the desperation and helplessness of the Pakistani economy which has rapidly lost its resilience in recent years. This results in currency depletion, currency depreciation and increased debt service obligations. The situation of Pakistani economy has also deteriorated due to loss of growth momentum after Covid pandemic outbreak, higher level of double deficit and drying up of foreign investment, etc.
The economic problems facing Islamabad would not be easily solved by desperate unconventional measures. Pakistan needs structural changes because the problems in the economy are deep rooted. Temporary solutions may provide some respite and respite, but Islamabad cannot afford to put off its reforms any longer.
China had agreed in principle in March 2022 to extend another $2.5 billion in commercial loans to Pakistan for one year, out of about $21 billion in outstanding official loans, including commercial deposits, bilateral and secure.
This is in addition to Beijing’s earlier decision to defer more than $2 billion, bringing the total deferral amount to $4.5 billion.
Meanwhile, the IMF has also agreed to extend the Extended Financing Facility to Pakistan with additional funds upon fulfillment of its conditionality of removing subsidies and increasing taxes and electricity tariffs.
Pakistan’s debt-ridden economy is now forced to fulfill IMF conditionality requiring the management of external financing needs which, among other things, was also aimed at avoiding the depletion of foreign exchange reserves.
Pakistan, according to official data, owed $16 billion to non-Paris Club countries as of December 31, 2021, of which China’s bilateral debt amounted to $14.81 billion.
China’s SAFE deposits were $4 billion. Pakistan also held commercial loans to China to the tune of $10.77 billion provided by different consortia of international and domestic dollar banks. Chinese commercial loans to Pakistan amounted to over $2.5 billion till December 2021.
The IMF had assessed the gross needs of Pakistan’s external financing sector at over $30 billion in the 2021-22 financial year, while the current account deficit was projected at $12.9 billion. dollars at the end of the 6th review under the $6 billion expanded financing facility program for Pakistan.
Nevertheless, by the end of June 22, the current account deficit should end up at a much higher level, estimated between 16 and 18 billion dollars. The IMF has estimated gross domestic financing needs at $35 billion for the 2022-23 fiscal year budget.
On June 10, the new finance minister of the Pakistani government, Miftah Ismail, presented a budget of 47 billion dollars (9.520 billion PKR) aimed at achieving economic growth of 5% below the growth of 5.97% of the previous year.
Of the total annual budget, about 40% is earmarked for paying external and domestic debt, indicating that the country’s debt service could reach $23 billion in the 2022-23 budget.
Pakistan’s foreign exchange stood at $9.2 billion at the end of May, which is enough to cover just 45 days of Pakistan’s import bill. The cost of imports would further increase due to the continued decline in the exchange rate of the PKR against the dollar, which stood at 205 PKR against the US dollar for the first time in history on June 7.
Pakistan’s economic difficulties are not expected to ease in the coming weeks. The country’s import bill continues to swell due to oil imports and other spending, while exports have not increased enough to cover the current account deficit.
The lack of international support has further aggravated the situation. Pakistan needs to make tough decisions and undertake economic reforms in order to stabilize and revitalize its economy.
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