Taking stock of economic situation

Business Recorder

28-04-2025

EDITORIAL: A well-respected former Finance Minister and academician Dr Hafeez Pasha stated on AAJ Television that the historical rise in remittance inflows in the current fiscal year can be sourced to the State Bank of Pakistan (SBP) purchasing dollars from the market that originated from hundi/hawala (unofficial and illegal inflows) to shore up foreign exchange reserves – a policy that he pointed out was not sustainable.
This brings into question SBP Governor Jameel Ahmed's claim made on 13 April 2025 during his address to Stock Exchange market players that remittances stood at 4.1 billion dollars in March 2025, a rise of 37 percent year-on-year compared to 2.95 billion dollars in March 2024 – a rise that he attributed to seasonal factors, improved formal banking channels, the onset of Ramazan as well as policies encouraging remittances through formal channels. Ahmed maintained that the rise in remittances would ensure that the current account remains in surplus, adding for good measure that this is the best external account performance in the last two decades.
In response to the Governor's assertion Dr Pasha pointed out that the balance of payment consists of two accounts — current account (which includes trade and remittance inflows) and the financial account which is performing extremely poorly as the country is witnessing a negative outflow notwithstanding the International Monetary Fund (IMF) programme as well as rollovers of 16 billion dollars by the three friendly countries – Saudi Arabia, China and the UAE. He added that the country had budgeted around 10 billion dollars of new loans out of which only around 5 billion dollars have materialised so far, which explains reserves of 10.205 billion dollars on 18 April 2025 with rollovers already secured of 12 billion dollars with the remaining four billion dollars expected to be secured for another year as and when they mature. The Governor projected reserves of 14 billion dollars by end June this year, which is 2 billion dollars less than the envisaged rollovers.
Business Recorder has invariably maintained that remittance inflows are generally not responsive to politics as the decision is taken by the remitters keeping in mind their family's economic needs (which rise during Ramazan and during periods of inflation) but with a worldwide recession feared, fuelled by the Trump administration's tariffs, employment opportunities abroad may be seen as not permanent.
Dr Pasha also challenged the Pakistan Bureau of Statistics (PBS) accuracy in determining the rate of inflation by pointing out that the Bureau assumed that the price of fuel had declined, which was the case in its international price, but failed to take account of the fact that the government decided not to pass it on to the consumers by raising the petroleum levy to first divert extra collections towards reducing the electricity tariffs and more recently to divert it to Balochistan's development by constructing a road. These obvious challenges to data integrity not only disable the government from taking appropriate and timely measures to deal with the situation but also account for the IMF's statement that there are weaknesses in the National Accounts and Government Finance Statistics (GFS), which explains why the 'authorities are prioritising addressing these weaknesses, supported by Fund Technical Assistance on the GFS and a new Purchasing Power Index.'
Dr Pasha also recommended that exporters must continue to be given incentives to ensure that the country's exports rise. The IMF's ongoing programme argues that subsidies have undermined the development of a dynamic and outward-oriented economy and that 'despite all this support the business sector has failed to become an engine of growth and the incentives eventually weakened competition and trapped resources in chronically inefficient industries.' One would be hard-pressed not to agree with this statement, as decades of incentives have yet to produce a viable industrial sector in this country. And as per the Fund, the country has struggled to develop more sophisticated export goods, and the share of knowledge intensive exports remains low.
Dr Pasha's support for the farmers necessitated by the government refusing to procure wheat as in the past (that led to the farmers dumping on the market at low rates), another IMF condition, is not tenable because this would imply that next year there would be less sowing of wheat with a shortfall. That maybe true, but one has to acknowledge the veracity of the Fund's analysis, notably that 'government interventions in agricultural commodities have created distortions inhibiting the sector's productivity and harming Pakistan's medium term potential.'
The obvious solution to Dr Pasha's concerns with respect to exports and agriculture output would have been for the government to negotiate phased reforms with the Fund. However, that option is no longer available based on the fragile economy and the persistent failure of subsequent administrations, including the incumbent, to delay or reverse reforms pledged under the previous over twenty Fund programmes. One would hope that to increase leverage with the IMF the government seeks to at worst keep the current expenditure at the same level as last year (budgeted at 17.02 trillion rupees) and at best to reduce it by at least 2 trillion rupees through voluntary sacrifice by the elite recipients that would provide a breathing space to the general public in terms of a phased approach to harsh upfront IMF conditions.
Copyright Business Recorder, 2025