Pakistan’s total debt (excluding liabilities) grew from Rs56.84 trillion in June 2022 to Rs73tr in June 2023, according to the State Bank of Pakistan. The amount was equal to 86.2 per cent of the country’s GDP. External debt (part of the total national debt) also grew (in rupee terms) from about Rs24.36tr to Rs32.5tr. All this happened during the days of the PML N-led multi-party coalition government of the Pakistan Democratic Movement.

Now the coalition government is no more, and a caretaker setup has been installed to hold general elections across Pakistan. Despite clarity in the Constitution of Pakistan, the nation does not know when the caretakers will discharge this prime responsibility.

Regardless of whether they hold elections within the stipulated period of 90 days from the dissolution of the National Assembly or overstay, the economic policies pursued by them during the transitory period will have an impact on the pace of further growth in debts.

And in future, acceleration or deceleration in the pace of national debt growth will continue to have a more decisive effect on its economy than anything else.

Rising debt, increasing circular debt, falling remittances and the continuing depreciation of the rupee continue to ail Pakistan regardless of who is holding the reins

Another thing that will continue to exert direct pressure on economic policymaking will be the country’s energy sector’s circular debt. During the last fiscal year that ended in June, a gross increase of Rs789 billion was recorded in circular debt. But after two backbreaking energy tariff hikes and thanks to massive budget subsidies, the stock of circular debt stood at Rs2.31tr at the close of FY23, up Rs57bn from Rs2.25tr at the beginning of the year.

Plans are underway to reduce the gas sector’s circular debts that form part of the overall energy sector circular debts, which means gas prices will be increased shortly.

Electricity prices have already been raised, and tariff slabs have so changed that every household and industry is now paying two to three times more for using the same amount of electricity units that they used to consume a year ago.

Last week, prices of petrol and diesel also went up for the second time within a fortnight. Petrol has now become dearer by about 15pc or Rs40 per litre. Unmanageably higher energy prices mean the caretakers — and the elected government that will come into power after elections — will find it difficult to revive industrial growth. In the last fiscal year, the large-scale manufacturing sector witnessed an annualised decline of 10.26pc.

Higher energy prices will also translate into more intense inflationary pressure making it difficult to keep inflation around 20pc-22pc, the band recently projected by the central bank. National average consumer inflation stood at 28.3pc in July.

The rupee’s ongoing depreciation will also make it difficult to contain inflation within the projected limits of 20pc-22pc. Pakistan’s basket of goods used for calculating the consumer price index contains many imported items, and locally produced goods rely heavily on imported raw materials. Because of this, the rupee depreciation accounts for around one-fifth of inflation.

So, an important question is: Can the rupee’s slide be halted? Frankly, the answer is ‘no’. Because forex inflows in the country fall short of meeting forex outflows, and this situation cannot be reversed in the foreseeable future. The rupee may continue to shed value if the demand for foreign exchange remains stronger than the supply. And that is exactly what may be the case throughout this fiscal year.

Demand for the dollar has been on the rise since the beginning of the fiscal year in July as the government has lifted restrictions on imports. This import-led demand will rise faster in the months to come as Pakistan steps up efforts to revive its economy.

While import spending is sure to grow quite fast, export earnings may not. Very high inflation and especially skyrocketing energy prices are bound to push up the cost of production of export goods.

Whatever incentives the rupee’s depreciation may offer to exporters will be outmatched by higher energy prices and higher costs of imported raw materials. This means the trade deficit is bound to widen month after month.

Traditionally, Pakistan has done well in the years when its forex earnings through exports of goods and remittances have equalled bills of imported goods. But this year, this might not be the case as remittances are also falling.

In July this year, remittances declined to $2bn, down from $2.5bn in July last year. Remittances from all four key host countries of the Pakistani diaspora — Saudi Arabia, UAE, UK and US — show a declining trend. Since the decline in remittances from these countries in July 2023 was a continuation of the similar trend seen throughout the fiscal year 2022-23, one cannot expect a quick reversal.

In FY23, remittances from Saudi Arabia and UAE had fallen to $6.45bn and $4.65bn, respectively, from $7.75bn and $5.85bn. Similarly, remittances from UK and US

have also fallen to $4.06bn and $3.09bn, respectively, from $4.49bn and $3.09bn. In 2022 and in six months of 2023, a record number of Pakistanis went to Saudia and UAE, but that could not boost remittances from there.

This suggests that (1) overseas Pakistanis have started investing their savings in host countries and (2) are gradually losing interest in the economy of their homeland. Unless their confidence in Pakistan’s economy is restored, one should not expect remittances to grow in future.

Some structural weaknesses in Pakistan’s banking system, like delays in handling remittances and undue patronage of open market forex operators by some elements in the establishment, also divert remittances’ flow from the interbank market to Hundi/Havala. That obviously lower volumes of official remittances.

The rupee lost value against the US dollar in the interbank market last week both due to increased dollar demand for imports and because of the diversion of part of remittances from the interbank to the grey forex market.

Published in Dawn, The Business and Finance Weekly, August 21st, 2023