No signs of economic recovery ahead for Pakistan. On the economic front, alarm bells continue to ring as there is little relief in the country’s poor economic conditions.
In its most recent monetary policy decision on November 25, 2022, the State Bank of Pakistan (SBP) raised the policy rate from 15% to 16%. This decision was made primarily due to policymakers’ inability to reduce inflationary pressures, which have proven to be not only stronger but also more persistent than their previous expectations.
The SBP believes that if measures to curb rising inflation are not taken in the short run, it will become entrenched in the long run. It would rather pay the short-run costs of raising the policy rate than suffer the long-run consequences of doing so.
Furthermore, the SBP states the pressure on the external front will ease in the upcoming months. Although it expects imports of agriculture inputs to increase and exports to decline due to the massive floods in the last monsoon season, the decline in global oil prices and the intensity at which policy rates are increased is likely to reduce the pressure from the current account deficit on Pakistan’s economy.
It is clear that the SBP is expecting favorable outcomes in the global economy to soften the pressure on Pakistan’s economy. The foreign exchange reserves held by the SBP continue their downward trend. They were at $7.8 billion on November 18, 2022, down from $8.9 billion on October 28, 2022.
The reserves increased by approximately $1.5 billion in the last week of October but dropped by $1 billion in November. The official interbank PKR to USD exchange rate is fluctuating around the 223 mark, while the real effective exchange rate was reported at 90 in September 2022. Although the real effective exchange rate may suggest an appreciation of the rupee with respect to the US dollar, the lack of reserves coupled with the role of currency market speculators is likely to trigger a downward trend for the rupee.
Unless the government is able to build its foreign exchange reserves, it is unlikely to manage the influence of currency market speculators and in turn appreciate the rupee value to what it believes is a more desirable level.
The trade deficit, as reported by the Pakistan Bureau of Statistics (PBS), was 40% lower in October 2022 compared to the value in October 2021 as it declined from $3.9 billion to $2.3 billion. Exports dipped by 3.3% while imports fell by 26%.
The trade deficit in the first four months of FY23 was 26% lower than that reported in the same time period of the previous year as it declined from $25 billion to $21 billion, again driven primarily by the decrease in imports. The drop in imports was forced by the imposition of import restrictions and the curtailing of domestic demand. The import curbs, which included import bans and delays in opening letters of credit, created trade friction that has not only impacted imports but also the ability of exporters to sell their products abroad.
