The Pakistan Bureau of Statistics (PBS) on Wednesday released data which showed that the trade deficit widened to $25.5 billion in the first six months (July-December) of current fiscal year due to a significant surge in imports that outpaced the increase in exports. The deficit was $13.2 billion (or 106%) higher than the comparative period of previous fiscal year, it added. The annual trade deficit target of $28.4 billion has become irrelevant due to higher imports.
Imports during the first half increased two-thirds to nearly $40.6 billion. In absolute terms, the imports grew $16.1 billion, according to the PBS.
The central bank has introduced a cash margin requirement (CMR) for more imported goods besides curtailing consumer financing to ease the import pressure. However, these measures have failed to contain imports that have risen to a new peak.
PBS said that exports of goods remained at $2.7 billion in December, higher by 16% (or $374 million) over the same month of previous year. The trade deficit widened 85% year-on-year to $4.9 billion in December 2021.
The central bank’s foreign currency reserves are constantly on the decline and dipped further to $17.9 billion, as the impact of a $3 billion Saudi Arabian loan is being diluted.
The State Bank of Pakistan on Wednesday further amended foreign exchange regulations requiring exporters to bring export proceeds.
Economic growth in FY22 is now expected toward the upper end of 4-5% CAD rose to $0.8 billion in July and $1.5 billion in August, reflecting both vigorous domestic demand and high global commodity prices
Remittances remained strong, growing by 10.4% during July-August
Exports also performed reasonably well (averaging $2.3 billion per month Rupee depreciated by 4.1% since July Many other currencies depreciated recently
In FY21 primary deficit declining by around ½ percentage points to 1.4% of GDP Improvement largely stemmed from strong growth in tax and petroleum development levy Deficit contained owing to significant deceleration in non-interest expenditures In the first two months of FY22, FBR revenue grew by over 40 percent (y/y) Federal PSDP releases rose to an all-time high for this period, equivalent to nearly 44% of their budgeted amount for the full year.
Any unforeseen slippages in the fiscal stance would further bolster domestic demand, imports and inflation. Historic cuts in policy rate and introduction of SBP Covid-related support packages help private sector Private sector credit grew by more than 11% during FY21
Consumer loans (mainly auto finance and personal loans) followed by working capital loans Inflation fell from 9.7 percent (y/y) in June to 8.4 percent in both July and August Core inflation also fell in both urban and rural areas in August.
Nevertheless, prices remains relatively elevated, with month-on-month increases of 1.3% in July and 0.6% in August. Inflation expectations of both households and businesses have drifted up and wage growth has picked up Inflation outlook largely depends on the path of domestic demand, notably fuel and electricity, as well as global commodity prices.
MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth and stands ready to respond appropriately.
“The exports of Fruits, Vegetables, Meat, Dairy products, Chemicals, Electrical equipment, Machinery, Paper & Paperboard have contributed to this increase. We continue to encourage legal, secure, transparent, consistent & reliable trade with Afghanistan. Exporters are urged to aggressively market their exports to Afghanistan. We also commend the efforts of MOC’s Trade & Investment Counsellor & urge him to provide even greater facilitation to our exporters,”
“The previous Afghan government imposed higher taxes on Pakistani goods but the main cause of the decline in the exports is the collapse of the banking system in the war-torn country,” he added, saying that with the US withdrawal in April the Pakistani exports of goods via Torkhan reduced by 50 per cent.
“Around 70 per cent exports are of cement because the construction industry is a large one in Afghanistan which was brought to a standstill by the Taliban take over. This is what traders are telling us. Let’s see what happens in the next few weeks,” he said.
Traders said that majority of the share in exports was of Punjab province but local traders and middle men were also benefiting from it in Peshawar.
“The transporters and truck owners are majority Pakhtuns while the middlemen are also from Peshawar. Local traders are involved in exports too but on small scale like jaggary is exported from Peshawar which is in great demand in Afghanistan and tribal belt,” they said.
A local customs clearance agent and trader Mujib Shiwari said that the competition Pakistani traders faced in Afghanistan from Iran and India had almost disappeared and this was a golden opportunity but the new regime in Kabul should reduce taxes on Pakistani goods and ensure security for Pakistani vehicles.
“Security is a major concern and the new government could facilitate Pakistani traders in this regard but another problem was the banking system in Afghanistan which is non-functional after the fall of Kabul and transaction are not possible for traders via banks,” he informed, saying that in the past there were heavy taxes on Pakistani goods in Afghanistan and officials were also corrupt.
Most other traders are worried that the lack of US funding for the new government would push the country’s economy into recession and the purchase powers of the local would drop dramatically as in the past two decades Afghan traders demanded the best food items and other goods which will no more be the case due to declining economy.
“Still we have to supply them with flour, rice and vegetables as well as ghee and oil and Afghanistan is a promising market to a great degree,”
Monetary policy involves central banks’ use of instruments to influence interest rates and/or money supply in the economy with the objective to keep overall prices and financial markets stable. Monetary policy is essentially a stabilization or demand management policy that cannot impact long-term growth potential of an economy. Preamble to SBP Act, 1956 envisages monetary policy to secure monetary stability and attain fuller utilization of economy’s productive resources. In SBP’s view, the best way to achieve these objectives on a sustainable basis is to keep inflation low and stable.
Low and stable inflation provides favorable conditions for sustainable growth and employment generation over time. It reduces uncertainties about future prices of goods and services and helps households and businesses to make economically important decisions such as consumption, savings and investments with more confidence. This, in turn, facilitates higher growth and creates employment opportunities over the medium term leading to overall economic well-being in the country.
In practice, SBP’s monetary policy strives to strike a balance among multiple and often competing considerations. These include: controlling inflation, ensuring payment system and financial stability, preserving foreign exchange reserves, and supporting private investment.
How does Monetary Policy Work? SBP signals its monetary policy stance through adjustments in the policy rate; that is, the SBP Target Rate for the overnight money market repo rate. Changes in the policy rate impact demand in the economy through several channels and with a lag. In the first place, changes in policy rate influence the interest rates determined in the interbank market at which financial institutions lend or borrow from each other. The market interest rates are also influenced by central bank interventions in money and foreign exchange markets as well as by its communication.
The changes in market interest rates influence the borrowing cost for consumers and businesses as well as the return on deposits for the savers. Generally, lower interest rates encourage people to save less and consume/invest more, and vice versa. Changes in the policy rate also influence the value of financial and real assets, impacting people’s wealth and thus their spending. The adjustment in demand finally affects the general price level and thus inflation in the economy.
The preamble of the SBP Act, 1956 envisages these objectives as ‘whereas it is necessary to provide for the constitution of a State Bank to regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the country’s productive resources.’SBP focuses on achieving monetary stability by controlling inflation close to its annual and medium-term targets set by the government. At the same time, SBP also aims to ensure financial stability, particularly the smooth functioning of the financial market and the payments system. Consensus in literature as well as country experiences suggests that price and financial stability facilitate the achievement of sustained economic growth in the long-run.
Monetary Policy Committee is responsible and fully empowered to decide the monetary policy stance. Section 9E of the SBP Act 1956 lays out the powers and functions of the Monetary Policy Committee that have been mainly identified as to:
(a) formulate, support and recommend the monetary policy, including, as appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in Pakistan and may make regulations for their implementation;
(b) approve and issue the monetary policy statement and other monetary policy measures.
Currency depreciation in Pakistan has always been “involuntary”. The authorities did not let the currency depreciate when an adjustment was due. The rupee was overvalued for a long time. Historically it has slipped only when the authorities were unable to control the supply of dollars any longer. Public debt has soared as a result; the foreign exchange reserves have been depleted. A strong rupee has also caused the trade and current account deficits to grow.
Under these conditions, the gains form depreciation are hard to come by. The sudden plunges in the value of the rupee cause panic, further compromising the gains. The impact of depreciation on foreign trade and related sectors depends on three broad factors. One, inflation in other countries particularly main trading partners; two, domestic prices; and three, overall macroeconomic conditions and policies, particularly during the depreciation phase.
The first two factors determine the real effective exchange rate (REER) and thereby external competitiveness. A higher external competitiveness leads to higher gains. The size of gains depends on the nature of exports and imports and the capacity to export. The third factor determines the extent to which depreciation will help boost the economic activity (thus enhancing the capacity to export). If any of these factors is missing, the potential gains from depreciation may be compromised.
The decline in trade and current account deficit was mainly supported by contraction in imports. It is because of this that no significant impact of depreciation on employment and poverty was observed. The fault does not lie with depreciation. The adverse impact of the factors highlighted above outpaced the potential gains from the depreciation.
Any assessment of impact of depreciation on exports, imports and employment must consider the overall state of economy and policies. It must account for two counterfactuals. One, what would have been the situation of exports, imports, trade and current account deficits if rupee was held at the 2017 value? Two, what would have been the gains from depreciation if rupee was allowed to adjust before the balance of payment crisis?
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