Tax revenue collection remains behind the target and the fiscal deficit is growing, forcing the federal government to borrow excessively from commercial banks at high rates of return.

Between July 1 and October 21, the federal government borrowed Rs824 billion, while tax collection during July-October totalled Rs2.144 trillion against the target of Rs2.148tr. The cost of bank debt is growing. (The cut-off yield on six-month treasury bills rose from 14.8 per cent at the end of June to 15.74pc on October 19).

This means that the government will have to spend larger sums of money on domestic debt servicing — and that will leave little for development spending for future economic growth and job creation.

In October 2022, initially estimated tax revenue remained 17pc lower than the target as political chaos spread across the country and the collection of import duties fell. Tax collection at the import stage is falling due to the tariff and non-tariff restrictions on imports — imposed to contain the import bill — remain in place. Imports are coming down, however, and the trade deficit is shrinking.

The cruel truth is that as more and more sectors of the economy feel the pinch of the floods, demand will decline and headline inflation will ease

Since the trade deficit is down solely due to reduced imports, its sustainability is under question. Export earnings remain almost stagnant despite numerous incentives offered to exporters. Forex markets are smart. They know that the reduction in the trade deficit (of $4.2bn or 26.6pc in July-October 2022) is qualitatively poor — exports grew just around 1pc during this period — and, hence, unsustainable.

That is why news of the slashed trade deficit had no impact on the rupee’s health. The good news about possible Chinese forex support during Prime Minister Shahbaz Sharif’s two-day visit also had no impact on the exchange rate.

Unless the promises made by China translate into tangible actions and expected bilateral debt relief and fresh forex inflows become visible, the rupee will continue to reflect the current state of poor forex supply in the market.

The November 3 assassination attempt on Imran Khan during the PTI’s “long march” and the protests and agitation that ensued afterwards have aggravated the existing political chaos. How this will affect the forex market and exchange rate in the coming days and weeks is anybody’s guess.

Meanwhile, the State Bank of Pakistan has allowed forex companies to retain 20pc of inward remittances with them for individual over-the-counter clients and sell the remaining 80pc in the interbank market. (Earlier, they were required to sell 100pc of such remittances to banks —and that had created the worst kind of shortage of foreign exchange in the open market).

Question marks remain on how provinces ruled by different political parties can implement the Kissan Package efficiently amidst ever-deepening political chaos and growing mistrust

The rule has been relaxed in anticipation of forex inflows from China, Saudi Arabia and international financial institutions. Following a recent $1.5bn inflow from the Asian Development Bank, the SBP’s forex reserves have risen to $8.913bn from $7.44bn but are still insufficient to cover even one-and-a-half months of imports.

Inflation in Pakistan, as in most countries of the world, continues to rise rapidly. Headline consumer inflation in October stood at 26.6pc up from 23.2 in September. Such decades-high inflation is partly a reflection of decades-high global inflation in major economies of the world.

Besides, it indicates that the post-flood aggregate demand moderation is taking time and the effects of the supply shocks are now peaking. After resorting to heavy monetary tightening between September last year and July this year, the State Bank of Pakistan is keeping its interest rate on hold — and wisely so. Interest rate tightening at this stage will make post-flood economic recovery too difficult without causing the current inflationary pressures to subside in the near future.

Post-flood supply shocks at home, the anticipated increase in domestic energy prices, global commodities’ supply disruptions amidst escalating Russia-Ukraine war and lagged impact of 7.8pc rupee depreciation in July-October plus ongoing exchange rate volatility may potentially offset the inflation-taming effect of interest rate tightening — at least in the short run.

Food inflation is rising even faster. In October, annualised food inflation soared to 34.7pc in urban areas and 37.2pc in rural areas from 30.8pc and 32.7pc respectively, in September, according to the Pakistan Bureau of Statistics.

The PML N-led coalition government has recently come up with a comprehensive relief package for farmers hoping that the package could indirectly help contain food inflation as well. The package includes such measures as the reduction in prices of DAP fertiliser, subsidy on Urea, provision of natural gas to farmers on reduced rates and fixed electricity tariff for them.

In the best-case scenario, all these measures may improve agricultural supplies sometime in the next quarter and help ease food inflation to some extent. But no immediate relief is in sight. Besides, question marks remain on how provinces ruled by different political parties can implement the Kissan (farmer) Package efficiently amidst ever-deepening political chaos and growing mistrust.

Headline consumer inflation may start easing next year as aggregate demand contraction becomes widespread. Agriculture, livestock, textiles, automobiles, cement, housing and construction industries are currently under stress. As more and more sectors of the economy feel the pinch of the floods, aggregate domestic demand would decline accordingly, and headline inflation would ease.

But as inflation easing will come with slowed economic growth cost-of-living crisis would not go away — it will instead take an uglier turn. People are currently suffering from dwindling real income: many will be jobless and have no income at all. This sounds cruel but is true.

According to the latest government estimates, the economy will grow 2.2pc during this fiscal year, down from 5.9pc last year. The World Bank has warned that post-flood economic crises may throw up to 0.9m more Pakistanis out of jobs.

Published in Dawn, The Business and Finance Weekly, November 7th, 2022