The most difficult task for the new government is to control inflation, as people have been angered by the high prices of almost all commodities under the previous government.
Another economic challenge is debt management, as Pakistan suffers from low GDP growth, with the highest amount of internal and external loans absorbing almost all of our income to repay them. According to some experts, Pakistan is going through a period of technical failure as we repay loans after securing loans from external and internal sources. Default is said to be imminent sooner or later. A proper system of short and long term planning and debt management is immediately necessary to get rid of loans, especially external loans.
Foreign direct investment (FDI) is another challenge for the government, as Pakistan is one of the least attractive destinations for international investors, although it may prove to be a great opportunity for international investors who are normally looking for such investments where they can reap maximum returns and profits. Pakistan could be one of these destinations, but international investors are afraid of us for multiple reasons, including the security situation coupled with political instability. The role of the Board of Investment (BOI) is critical and needs to be strengthened and expanded by placing professionals within its framework instead of lethargic bureaucrats. It is very unfortunate that professionalism is a rare commodity in this organization.
It is not only inflation that needs to be brought under control, but many other economic challenges are also on the waiting list. Let’s start with the lack of long-term and short-term economic planning, which is essential to face the economic challenges ahead. Pakistan is facing the brunt of high oil prices, commodity prices and rising food inflation. The credit portfolio has gone viral crossing all the limits with an increase in debt service which is a real headache. Circular debt is another headache. The trade imbalance is a serious danger, with consequences for the current account deficit. The monetary policy of the State Bank of Pakistan promises no hope, and is in fact rather hopeless. The entanglement of the IMF program poses another threat, shattering hopes.
International oil prices are now hovering around $120 a barrel due to the Russian-Ukrainian conflict, resulting in Pakistan’s highest ever fuel prices. Fuel prices over the past three years have increased by around 150%, electricity prices by around 95%. As unemployment rages, people are in crisis: facing high inflation while falling below the poverty line. The middle class in Pakistan is shrinking day by day. The new government is in a very difficult position in the face of this challenge.
Raw material and food prices have broken all records while breaking people’s backs. All kinds of price indices including Consumer Price Index (CPI), Sensitive Price Index (SPI), Wholesale Price Index (WPI) have broken all records over the past last three years. According to our information, a 70-year-old record has been broken. According to the Federal Bureau of Statistics, prices for sugar have increased by around 83%, flour by 85%, chicken by 100%, beef by 100% and edible oil by 150% over the past three years. . Drug prices, including life-saving drugs, are so high that they are unaffordable for an average Pakistani.
Pakistan’s loan portfolio is another sensitive and worrying area, around 85% of our GDP in violation of the Fiscal Responsibility and Debt Limitation Act 2005, which prohibits the government from exceeding the 60% maximum. The external debt is around $128 billion, undoubtedly huge in size and volume and requiring a big financial boost and debt servicing support. The largest part of our annual budget is devoted to servicing the debt. Another worrisome factor in debt management is the circular power and energy related debt which currently stands at around 2.9 trillion rupees.
Trade imbalances in the form of more than double imports to exports make matters worse. Pakistan needs to increase its exports through diversification of exportable goods and services, especially those with export potential in the field of information technology. Special Economic Zones (SEZs) under the China-Pakistan Economic Corridor (CPEC) should be established at an early stage to improve export diversification and brand image. It is indeed necessary to create industrial clusters through these SEZs to increase exports by taking maximum advantage of the use of electricity by using the full capacity of the power plants established by the IPPs.
The ideal monetary and fiscal policy framework ensures stable economic growth and development in any country. Monetary policy is used to stimulate investment, control inflation, stabilize prices through the policy rate and by providing financing or refinancing facilities to industrialists and exporters. In addition, the depreciation of the Pakistani rupee creates problems of cost hyperinflation, discouraging investment without significant improvement in exports, expecting only a slight difference in overall imports and leading to a trade-off on much-needed growth.
Pakistan turned to the IMF in 2019 for the 22nd time for support in the face of deteriorating economic conditions. The IMF has extended its support through a $6 billion loan arrangement under the Extended Financing Facility (EFF) for its member countries. There were conditions attached to the loan facility, such as higher energy tariffs, removal of subsidies, tax increases, privatization of public entities such as PIA, Karachi Steel Mills, DISCO, etc. , and fiscal budget adjustments. All of these conditions tend to create problems for the population in the form of inflationary pressures.
There is an immediate need to stop inflation and control prices, especially food prices. Monetary policy tools should be used with caution to stabilize prices, expand exports and create an investment atmosphere to ensure growth. Exports should be strengthened by promoting SEZs and diversifying supply chains. Last but not least, our huge loan portfolio and debt servicing needs immediate political intervention from the government to come up with a better debt management system, as it has all the potential to become a vicious cycle, disrupting the saving forever. .
The author is an economist.