Some 40 per cent of Pakistanis continue to live below the poverty line with little in sight to hope for better days. The country’s economic growth of 2.5pc recorded in July-September 2023 faltered to just 1pc in the next quarter. Overall growth in the current fiscal year (July 2023-June 2024) may hardly hit the 2pc mark amid persisting political instability, deteriorating security environment, rising energy prices and forex crisis.

The World Bank’s latest forecast says Pakistan’s GDP may grow only by 1.8pc-2.5pc in the next fiscal year starting from July. Meanwhile, around 10 million employable people are still jobless, and the number may rise in the coming months even if the recessionary trend seen in industrial output during the first seven months of the fiscal year is reversed.

At best, the output of large-scale manufacturing (LSM) for a full year may rise to 1.8pc, according to the World Bank estimates. LSM production rather declined by 0.5pc on a year-on-year basis in seven months.

An estimated 1.8pc growth in LSM is too small to affect joblessness, particularly because in the current economic environment of ever-rising energy prices, high-interest rates and import controls, even this much growth is only possible if industries become more efficient and cut production costs — which, in the case of labour-intensive industries like textiles and food, means ‘right sizing’ their employees.

Around 10m employable people are jobless, and the number may rise in the coming months even if the recessionary trend is reversed

An estimated 35pc shortage in water availability (caused primarily by climate change) for Kharif crops also threatens the output of the labour-intensive agriculture sector, which has driven overall GDP growth with its sectoral output expansion of 8pc and 5pc, respectively, in the first and second quarters of FY24.

Although consumer inflation slowed in February and March this year, average inflation during nine months FY24 (July-March) was still high at 27.1pc — almost unchanged from 27.3pc recorded a year ago in the same period. This shows how entrenched inflationary pressures have become and explains why the State Bank of Pakistan is unwilling to ease its tight monetary policy.

The recent increase in the prices of petrol and other petroleum products (effective April 1), the government’s decision to jack up electricity prices once again under the head of the fuel adjustment surcharge, and the expected delayed effect of the increase in gas prices from February may continue to fuel inflationary pressures in April-June, the last quarter of FY24.

This is exactly why the World Bank, in its recent economic update, says that full-year average inflation in Pakistan may be around 26pc.

Inflationary pressures will become more pronounced if the security situation in the Middle East worsens any further and Iran is dragged into the Hamas-Israel war after an attack on its embassy in Damascus last week allegedly carried out by Israel.

In this case, not only will the landed cost of imported fuel oil rise, but imports of other items, including industrial raw materials, may also become costlier due to related supply chain disruptions.

So far, import controls have helped Pakistan keep its rupee from depreciating despite obvious forex shortages. But what if the country pays more foreign exchange for the same volume of imports it currently allows? That would not only let more imported inflation creep into national consumer inflation but also make it more difficult to maintain exchange rates at the current levels.

The last tranche of $1.1 billion out of a $3bn short-term International Monetary Fund (IMF) loan is expected to come in shortly. It will help keep the exchange rates somewhat stable for a few weeks without taking a major hit on already low central bank foreign exchange reserves.

But, as the external financing gap for the next fiscal year (July 2024-June 2025) has been estimated around $24bn, nothing less than a fast-tracked large IMF loan — around $8bn-$9bn — topped with some climate change funding can help Pakistan move forward on the external account.

Finance Minister Muhammad Aurangzeb has said he would not waste time in approaching the Fund for a large, long-term loan. The Ministry of Finance has begun the spadework for this purpose. However, two important things to watch for are when exactly this new loan will be approved by the IMF and when Pakistan can draw its first tranche.

Inflows of foreign investment and additional forex funding by friendly countries — two important elements of the new government’s strategy to tackle balance of payments problems — remain dependent on the IMF’s new loan. Any delay in securing IMF funding would be simply unmanageable.

The current trend of rising foreign investment in Pakistan’s debt instruments is nothing but the re-arrival of “hot money” the nation has seen multiple times before — most recently during the PTI era.

This hot money is coming in as our treasury bills pay a very attractive return of about 21pc, and foreigners who buy them through a rupee-dollar dual bank account are allowed to convert the returns earned in rupees smoothly into foreign currencies and repatriate them easily back home.

Exports are doing reasonably well in a challenging environment and registered 9pc year-on-year growth in the nine months of FY24. Still, the goods trade deficit stood at $17bn during this period, which is equal to more than 74pc of the export earnings ($22.9bn).

Unless the volume of the trade deficit is brought down to half the export earnings and sustained at this level, the temporary relief we have seen in our current account deficits (mainly due to import bill contraction) will be over.

One thing is certain: this time, when the IMF offers a larger and longer-term loan, it will demand real liberalisation of imports — a demand it made in the past but showed flexibility. What will happen then?

Published in Dawn, The Business and Finance Weekly, April 8th, 2024