Globally, food and energy prices are up. During March, the Food and Agriculture Organisation of the United Nation’s food price index rose 12.6 per cent from February. It was the highest monthly rise since 1990. And, average crude oil price on March 14 stood above $106 per barrel, up from $85 on February 14 — showing an increase of about 25pc.

Faced with a large fiscal deficit, Pakistan can neither afford to continue to subsidise local energy products any longer nor can it afford to let its food import bill inflate further. The merchandise trade deficit is already too high — about $35.4bn in nine months to March 2022. This deficit is so large that even nine month’s home remittances ($23bn) fall short to finance it. This means energy prices in Pakistan should start rising soon and already high food prices should become higher.

The food inflation rose in 14.5pc and 15.5pc in March year-on-year in urban and rural areas respectively.

The recently administered heavy dose of monetary tightening and requirement of 100pc cash margins on imports of non-essential items cannot play a direct role in containing energy and food inflation. Future reading of the non-food, non-energy (NFNE) core inflation measure of the central bank would prove this point. During March the NFNE core inflation increased 8.9pc and 10.3pc year-on-year for urban and rural Pakistan, up from 7.8pc and 9.4pc in February.

The World Bank in its latest report has also singled out Pakistan as the country offering maximum energy subsidies and termed them unsustainable

General inflationary pressures may recede somewhat — after a lag of a few months — thanks to the 250 basis points (bps) increase in the central bank’s key policy rate, the rupee’s recent rise and the imposition of a 100pc cash margin on the imports of 177 non-essential yet commonly used import items. But that would be more due to a contraction in domestic demand. This means Pakistan’s economic growth would soon start decelerating.

The World Bank has predicted 4.3pc growth this year, down from 5.6pc a year ago. The Asian Development Bank believes growth would be 4pc. But given the feared demand contraction in April-June, the last quarter of FY22, even 4pc-4.3pc growth would be encouraging. The fragility of the current PML-N led broad coalition government and ongoing nationwide toxic political protests by ousted prime minister Imran Khan could also take a heavy toll on GDP growth.

The new government says it has inherited an “unmanageably large” fiscal deficit that was booked during July 2021-March 2022, the first nine months of FY22 under the previous government. Miftah Ismail, former finance minister, says that the budget deficit for FY22 could go up to 10pc of GDP — the highest ever in the country’s history, which logically leaves little space for the new government to boost economic growth through higher spending.

The recovery of the rupee is primarily a reflection of the interest rate hike and the requirement of 100pc cash margins on imports of non-essential items — fundamentally the rupee remains as weak as it was before

Financing of “Ramadan relief and cheap wheat flour packages” announced by the new government may also fatten current expenses if the fiscal room is not created for it through the gradual withdrawal of the subsidy on petroleum products.

Just before its departure, the PTI government had heavily subsidised petroleum products. The International Monetary Fund (IMF) is against it and is insisting on its withdrawal. The new government understands the importance of remaining in the IMF’s programme and the programme cannot continue without gradual withdrawals of energy subsidies in particular — and all other subsidies in general. The IMF has made this clear. What the current government can do at best is to seek some time to implement ‘subsidy reforms’.

The World Bank in its latest report on South Asia has also singled out Pakistan as the country offering maximum energy subsidies and termed them “unsustainable”. Requesting the IMF to let the energy subsidy programme continue is just not possible.

A dramatic recovery in the rupee value after the regime change seems temporary. After hitting an all-time low of 188.19 against the US dollar on April 7, the rupee gradually rose to 181.69 on April 14. This impressive recovery of 3.4pc within a week is primarily a reflection of the 250bps hike in the interest rate and the requirement of 100pc cash margins on imports of non-essential items introduced on April 7. Fundamentally the rupee remains as weak as it was before the exit of Imran Khan from power.

Exports of goods and services, remittances, inflows in Roshan Digital Accounts, you name any source, and there is nothing to suggest that Pakistan is going to attract unusually large forex inflows in near future. And, the State Bank of Pakistan’s forex reserves (as of 8th April) are just below $11billion — not enough to foot even two months of merchandise imports bill. Imports of goods should eat up a little less of our precious foreign exchange if international energy and food prices rise slower than before or don’t rise at all — which is fancy thinking at best. The tighter interest rate would undoubtedly contract overall imports to some extent but after a time lag and at the cost of decelerating the pace of economic growth.

Whereas the interest rate tightening would take some time to depress broad domestic demand its effect is sure to be felt immediately in large-scale manufacturing (LSM). LSM output has risen 3.9pc year-on-year in seven months through January 2022. February and March readings are already expected to reflect the effect of the mid-December interest rate hike of 100bps when the central bank raised its key policy rate from 8.75pc to 9.75pc. Now the 7th April’s 250bps further hike that took the policy rate to 12.25pc might choke LSM growth during April-June, the last quarter of FY22 — or even beyond that.

Much depends, however, on to what extent the tighter interest rate depresses the private sector credit offtake. In nine months of this fiscal year (between July 1, 2021, and April 1, 2022) the private sector’s net borrowing from banks stood at Rs1.198 trillion. Post-April 7 credit data would be important to watch.

Published in Dawn, The Business and Finance Weekly, April 18th, 2022