Pakistan’s economy is in the doldrums. To make the matter worse, inflation has reached alarming levels– 12.3% in December, 2021 – and the country’s currency is weakened to Rs 176 to a dollar– a 30% reduction in the past three years. This has put immense pressure on the Imran Khan government, as food and fuel price are skyrocketing.
The cooking oil prices have gone up by 130% since Khan became the prime minister while the cost of fuel has increased by 45%. Amid the economic instability, Imran Khan’s decision to pass a mini-budget or supplementary budget to facilitate financial aid from the International Monetary Fund (IMF) is set to increase taxes on a range of imports, exports and services. This will not only burden common households and hurt industry, but it will also compromise the country’s economic sovereignty too. Pakistan can easily slip into a debt-trap in case of loan defaulting, as it has already received USD 3 billion each from China and Saudi Arabia and USD 2 billion from the United Arab Emirates. Pakistan’s renowned economist Qaiser Bengali said “All the loans it has been taking now, from whatever sources, are to pay past loans.” Essentially the economy is bankrupt, as the country cannot pay its loans.
The IMF has agreed to provide a USD 6 billion bailout package for Pakistan, but the final approval will be given only after the Khan government meets certain conditions, which include fiscal and institutional reforms. Pakistan is desperate to get the IMF loan to enhance its foreign exchange reserves and strengthen its currency. The mini-budget was a part of the IMF conditions that compelled the Islamabad government to increase power tariff, levy higher duty on fuel prices and pull out tax exemptions on nearly 150 items, 140 of which are essential consumable and industrial goods. This, however, has angered people in Pakistan as the higher taxes have aggravated their sufferings. The mini-budget has fuelled inflation, irking millions of people who are finding it difficult to fulfil the basic requirements. The State Bank of Pakistan (SBP) has forecast high inflation of 9-11% in 2022. Opposition leaders in Pakistan have been criticising Khan-government for creating survival problems for poor people. Pakistani legislator Farooq Hamid Naek said “The revenue of the government is being increased at the cost of oppressing the common man.”
Industry and businesses too are feeling the heat. The Vice President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Nasir Khan, said the mini-budget would lead to smuggling of cheaper goods as the cost of domestically- manufactured goods would be higher due to withdrawal of tax exemptions, which will have a negative impact on industrial activities. The ongoing gas shortage has already impacted Pakistan industries, leading to a slump in exports. All-Pakistan Textile Mills Association has claimed that the exports were to be reduced by 20-30% in January due to gas shortages. In addition, the volatility in the exchange rate due to weak PKR is adding to Pakistan’s export woes.
(Source for a good graph: https://twitter.com/StateBank_Pak/status/1484799070950539264)
Pakistan’s exports remained stalled at USD 2.5-2.8 billion per month while imports increased by 66 percent during the second half of 2021.9 This has swelled the current account deficit (CAD) by 106.4 percent. Karachi Chamber of Commerce and Industry President Muhammad Idrees said “The present gas supply situation and the lack of remedial measures on the part of the government is hurting the exporters.” Now, the CAD has widened to USD 9.93 billion for July-December 2021, fuelled by a rising import bill. The SBP said the higher CAD was led by significant terms of trade shock amid ongoing economic recovery.10 Higher CAD is one of the major reasons for Pakistan’s sharply depleting foreign exchange reserves. Repayment of debt is another reason. Analysts and researchers asserted that the current CAD can create much bigger problems than the expected economic growth of Pakistan.