The current fiscal year that began on July 1 may turn out to be another year of low growth and high inflation due to political instability, uncertainty about elections and the growth-choking nature of the International Monetary Fund’s (IMF) short-term financial support.

This means people who don’t have jobs — and there are eight million permanently jobless people — may not get jobs during this fiscal year.

Typically, an average employed Pakistani supports a family of five. So, at least 40m Pakistanis will be struggling hard to survive, and many of them will have to depend on state welfare programmes and non-governmental organisations just to eat two square meals.

But Pakistan’s revenue resources are being consumed mostly in external and internal debt servicing, defence and spending on pay and pensions of the government employees. So, feeding at least 40m people through the state welfare programmes is just not possible.

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Large charities, including Edhi Foundation, JDC Foundation and Saylani Welfare Trust, have already raised alarm bells over dwindling financial donations after last year’s meagre 0.3 per cent growth of the economy.

Large charities, including Edhi Foundation, JDC Foundation and Saylani Welfare Trust, have raised alarm bells over dwindling financial donations to feed the impoverished

The government has set this year’s growth target at 3.5pc. But that may remain elusive in a generally growth-stifling environment that years of economic mismanagement have created and that the IMF’s short-term loan requirements have accentuated.

Disbursement from the IMF’s nine-month, three-instalment Standby Arrangement (SBA) of $3 billion will begin immediately after the approval of the programme by the IMF’s Board on July 12. But $1bn per quarter forex inflows can help ease the ongoing forex crisis only partially — and that, too, with serious consequences on economic growth, inflation and job creation.

The IMF has required Pakistan to do away with all subsidies, raise energy prices further, contain circular debt of the energy sector, enhance tax collection, lift all restrictions from imports and make foreign exchange rates completely demand and supply driven.

The central bank has already asked banks to start entertaining all import letters of credit (LC) instead of prioritising them subject to the availability of foreign exchange. And it has assured the IMF that it will refrain from fiddling with the exchange rates.

These two things are sure to push demand for foreign exchange and weaken the rupee, with no room for the central bank to keep the exchange rate in an artificial range, even temporarily.

That’s why the rupee has already started falling against the US dollar after making a euphoria-driven gain immediately after the signing of the staff-level agreement for the SBA on June 29.

The local currency is likely to remain under some pressure in July-September and under greater stress during October-December 2024. During this quarter, the pressure on the exchange rate will remain somewhat subdued because, despite the lifting of import restrictions, imports will take time to gather pace.

Besides, the narrowing of the gap between the interbank and the open market exchange rates after the signing of the SBA will initially help boost inflows of remittances.

But during October-December, the gap between the two rates may widen again after the general elections due in October-November or, due to political unrest, if the constitutional tenure of the would-be caretaker setup is extended.

In that case, part of the remittances will again start coming into the country through illegal hundi/havala channels affecting forex supply in the banking system.

A weaker rupee will make imports costlier, and imported inflation will make inflationary pressures even stronger. National average consumer inflation soared to 29.2pc in July-June 2022-23 from 12.15pc a year ago. But the Wholesale Price Index’s inflation reading that affects consumer inflation with a time lag was at a whopping 32.8pc in the last fiscal year.

Its pass-through on consumer inflation is due during the current fiscal year. Consumer inflation in June alone eased to 29.4pc from 38pc in May. A full one percentage point increase in the SBP’s policy rate (from 21pc to 22pc) announced on June 27 may help ease inflation, but only till the time the exchange rate remains relatively stable.

How soon and to what extent the energy price hikes, withdrawal of subsidies, imposition of new taxes, and expensive bank borrowing will start choking production and supplies will also determine the pace of consumer inflation because each of these factors is sure to increase cost-push inflation.

On the other hand, how soon and to what extent joblessness and business shutdowns and fall in net disposable income of households and companies start stifling aggregate demand may have an impact on easing inflation.

Large-scale manufacturing output declined 9.4pc in July-April 2022-23 and by a massive 21.07pc in April alone. With energy prices rising day by day, subsidies removed, and political uncertainty at its height, it would be naïve to expect a strong rebound in large-scale manufacturing (LSM) during the current fiscal year.

A modest increase, and that too on a shallow base, may contribute little to economic growth and still lesser to job creation. Slow expansion in LSM activities will, in turn, affect not only exports but also domestic trade.

As a result, the performance of the export sector, already hit by the withdrawal of subsidies and higher energy and financial costs, will be affected, and wholesale and retail trade activities will follow suit.

Pakistan’s goods’ imports consumed $55.3bn in the outgoing fiscal year despite the virtual halting of the opening of import LCs in a large part of the year. Still, the import bill was double the goods’ export income of $27.7bn.

The trade deficit was $27.5bn. Now that import restrictions are being lifted, the trade deficit during this year would obviously be much larger — at least $34bn, according to the IMF projection.

It will be too difficult for Pakistan to finance such a large trade deficit with remittances — in eleven months of the last fiscal year, remittances declined 12.8pc year-on-year to $24.8bn.

Published in Dawn, The Business and Finance Weekly, July 10th, 2023