Behind the falling rupee is the rising imports bill. Our imports’ bill was bound to surge and this was bound to affect exchange rates. The government knew this right when it set this fiscal year’s GDP growth target at 4.8 per cent following 3.9pc growth last year.

Where did the policymakers err in forecasting? Probably, they underestimated the growing demand for food, medicines, automobiles, industrial inputs and machinery etc. Probably, they were also not sure that global fuel and food prices would rise as fast as they did. And, almost certainly they over-relied on remittances.

A historic rise in remittances in the last fiscal year and continuation of the uptrend in this year seemingly made the government overconfident. It failed to put everything related to the external account in perspective. The result is before us. The rupee has lost 10.1pc value against the US dollar in less than four months, coming down to 173.46 a US dollar on October 20 from 157.54 on June 30. And imported inflation continues to fuel inflationary pressures everywhere in the economy.

In the last fiscal year, remittances grew 27pc year-on-year to $29.4bn for a variety of factors including repatriation of overseas Pakistanis’ savings in the host countries. Roshan Digital Accounts (RDAs) that enabled them to invest foreign earnings into Pakistan’s debt and equity markets through local bank accounts also thickened remittances’ flow.

The PTI government not only miscalculated the potential growth rate of remittances but also failed in forecasting the growth rate of imports

This 27pc annual spike in remittances in 2020-21 was a one-off — an 18-year historic high growth rate. But instead of looking at it in its right perspective (repatriation back home of overseas Pakistanis’ foreign savings who returned home after losing overseas jobs), the government became overly optimistic about — and dependent on — 2021-22 remittances. In doing so, it ignored two things, first the base effect and second the declining trend in workforce exports.

In the first quarter of 2021-22 (1QFY22), the growth rate of remittances has already fallen to 12.5pc from 31pc in 1QFY21 (volumes of remittances in July-Sept 2021 totaled $8bn against $7.14bn in July-Sept 2020). This is the base effect. As the year progresses, the growth rate can shrink further, more so because of stricter scrutiny of foreign exchange sent back home by the Pakistani diaspora. Foreign countries and banks have made remittances’ scrutiny stricter due to Financial Action Task Force concerns and on fears that part of the remittances (particularly those routed through forex companies) could somehow land into forex-starved Taliban-controlled Afghanistan.

The growth rate of remittances can also slide this year because of the lagged impact of lower manpower export in 2020 and 2021. In 2019, 625,203 Pakistanis had gone abroad on work visas, according to the Bureau of Emigration and Overseas Employment. In 2020, the number fell to 224,705 — and came down further to 135,653 in eight months of 2021. There is little hope for a big jump in manpower export from Pakistan in the next few years because traditional host countries of the Pakistani diaspora are not welcoming our workers as generously as in the past due to their own economic issues and due to geopolitical considerations.

Overreliance on RDAs is also unwise. RDAs basically provide overseas Pakistanis a platform to park part of the remittances for portfolio investment in debt and equity markets and in the housing sector. Since the amnesty scheme for investment in housing ended in June, forex inflow meant for this area is drying up. The flow of forex funds to be used for investment in equities remain erratic by their very nature.

The rupee has lost 10.1% value against the US dollar in less than four months

Such investment trickles in on hard news about the economy doing well but evaporates at the drop of a hat. Portfolio investment in the government debt papers may remain a lucrative thing for overseas Pakistanis, though.

Returns on such investment are much higher than they can get in their host countries — and would possibly stay high. Pakistan’s perennial balance of payments woes leaves no room for slashing these returns.

The PTI government not only miscalculated the potential growth rate of remittances but also failed in right-forecasting the growth rate of imports.

In 1QFY22, merchandise imports shot up to $17.473bn, according to the SBP’s balance of payments statement, from $10.637bn in 1QFY21. (Merchandise exports rose to $7.241bn from $5.354bn). Massive imports are the main reason behind a $3.4bn current account deficit in 1QFY22 against a surplus of $865m in 1QFY21.

Data from the Pakistan Bureau of Statistics (PBS) provided a glimpse of what actually pushed up the imports bill. During 1QFY22, imports of transport group surged 170pc, followed by petroleum 97pc, agricultural and chemicals group 77pc, textiles 75pc, metals 42pc, machinery 35pc and food items 38pc.

The rise in imports of petroleum and food items can be attributed more to their rising international prices and less to higher domestic demand. But the government failed to forecast rightly the quantum of possible increase in imports of textiles and metals. Setting an ambitious $21bn textile export target was not enough. It was also necessary to assess how much additional imported inputs would be required to meet this target — and how much additional imports of substitute textile products would land in the country. Similarly, the government should have foreseen the dramatic rise in imports of metals group after it kick-started activity in the construction sector. (Imports of iron and steel consumed $710m in July-Sept this year or 89pc higher than $375m recorded in the year-ago period, PBS data reveal).

Import bill of medicines, medicinal products and inputs of Pakistan’s medical industry more than tripled in July-Sept 2021 to $1.147bn from only $279m in July-Sept 2020. This occurred primarily due to the steep rise in prices of local medical products.

While revising sharply upwards prices of lots of locally manufactured medicines, the government ought to have foreseen its impact on imports of medicinal raw materials from around the world and a spike in imports of cheaper substitute medicines, mainly from China.

Published in Dawn, The Business and Finance Weekly, October 25th, 2021