Pakistan continues to face a liquidity crisis in spite of the revival of the International Monetary Fund (IMF) programme. The State Bank of Pakistan (SBP) had $8.8 billion of forex reserves for the week ended September 2, as per the central bank’s latest report, showing an increase of 14 per cent from a week earlier. The growth came after the country received the $1.12bn loan tranche from the IMF.

However, the reserves now represent import cover of just 1.6 months, up marginally from 1.5 months a few weeks earlier. Moreover, the devastating floods, which caused $15-20bn of losses, as per the government’s initial estimate, have also aggravated Pakistan’s economic fundamentals.

The ballooning current account deficit has drained the nation’s resources. The current account deficit shot up to the second-highest ever level of $17.3bn in 2021-22 from a deficit of $2.82bn in 2020-21, data from the SBP shows. The deficit has stayed north of $1bn in nine of the twelve months of 2021-22 and was $1.21bn in July 2022 (the first month of FY23). If the deficit remains high, then it will put an additional burden on the forex reserves and more pressure on the Pakistani rupee.

Read: Inflation is a tough nut

It is becoming clear that the inflow of funds from the IMF can give some respite, but it can’t fix the issue of persistently high current account deficit. The large deficit was driven mainly by the massive trade deficit of $48.38bn for 2021-22, which shot up by 56pc from a year earlier, as per a report from the Pakistan Bureau of Statistics (PBS).

Prices of various commodities have fallen from recent highs amid rising interest rates around the world, which could provide limited trade balance relief in the medium term

The increase in the trade deficit was due to the 42pc rise in imports as opposed to just a 27pc growth in exports. The situation will improve only when Pakistan figures out a way to curtail imports and lift exports.

Neither the IMF nor any other institution or a friendly nation can do this for Pakistan. The country’s policymakers will have to roll up their sleeves and fix the country’s financial health by zeroing in on the current account deficit. The good thing is that the potential end to the commodities super cycle will give some relief.

Prices of various commodities, such as wheat, copper, and crude oil, have fallen from recent highs amid rising interest rates around the world. The Brent oil price is down nearly 25pc from its recent peak. The Bloomberg Commodity Index, which tracks prices of nearly two dozen materials, including grains and energy products, has fallen by 13pc since mid-June. This decline should help cut down Pakistan’s import bill.

Although the weakness in commodity prices will provide support, Pakistan will still remain at the mercy of international markets. Another price spike will once again put the country in a difficult spot.

To get on a sustainable footing, steps must be taken that strengthen the local manufacturing base and reduce the country’s reliance on imports, particularly in the energy space. That’s because one of the biggest drivers of growth in current account deficits was the import of energy products like motor gasoline (petrol) and high-speed diesel.

The crude oil price surged in the first half of 2022, but prices of refined products like petrol and diesel went up even higher due to soaring demand. With high prices and growing consumption, Pakistan ended up spending $12bn on procuring petroleum products in 2021-22, PBS data shows, up a staggering 134pc from a year earlier. To make a sustainable reduction in imports, Pakistan must take efforts to push the domestic production of petrol and diesel higher.

Unfortunately, the oil refining industry in Pakistan, which is responsible for producing these fuels, hasn’t seen any growth for years. Rather, a large chunk of the oil refining capacity remains underutilised. As a consequence, roughly 30-40pc of the country’s diesel and 60-70pc of petrol demand is met through imports, as per various estimates. This must change.

Pakistan’s output of petrol and diesel can climb by around 50pc if refineries fully utilise their plants and move even higher if the industry expands its capacity. To do that, the policymakers must work together with the refining industry and other stakeholders, such as the independent power producers who are the primary consumer of a key refined product (furnace oil), to ensure full upliftment of fuels and complete utilisation of capacity.

For growth, the government must introduce favourable policies that encourage refiners to invest in expanding capacity and upgrading plants. The PTI-led government reportedly finalised such a policy that should be brought forward.

Additionally, the government should scale back its role as a key member of the oil market and deregulate the petroleum sector. Frequent government interventions, such as the regulator’s role as a price setter, have done more harm than good. Instead, the free and fair market competition must be fostered.

The above-mentioned actions should be accompanied by measures that aim to lift exports. Pakistan needs to open up its economy to the rest of the world and link with multilateral trading systems. By lowering trade barriers so that the domestic industries can procure raw materials and equipment globally at attractive prices, Pakistan will put the local companies in a good position to produce high-quality products and compete more effectively in the international market. Incentives like duty-free imports of machinery should be given to allow exporters to scale up their operations.

Moreover, the government bodies, especially the Trade Development Authority of Pakistan, should use modern technology and ensure that the export-oriented industry is fully equipped to take advantage of the online marketplaces whose role in global trade has increased significantly in the post-covid world.

For years, Pakistan has been struggling with a high current account deficit. It is high time that the policymakers concentrate on resolving this issue which should put Pakistan on a path to sustainable recovery.

The author can be reached at sarfarazakhan@yahoo.com

Published in Dawn, The Business and Finance Weekly, September 19th, 2022