World events and delayed decisions threaten outlook for external accounts – Breaking News – The Nation
The dilation in the prices of major world commodities, the acceleration of global monetary tightening, the relaunch of the Saudi facility, the ongoing reviews of the IMF-Pakistan Extended Financing Facility (EFF), fragile global economic growth and the conflict Russian-Ukrainian relations threaten the prospects for Pakistan’s vulnerable external account and cannot wait for the new leaders to make their decisions.
Pakistan’s current account (CAD) enlargement has jeopardized sustainability, requires immediate action to reduce unproductive government spending, discourage luxury imports in addition to encouraging non-traditional exports. The CAD has definitely widened amid soaring international commodity prices, strong domestic demand and delays in taking strong action. It is expected to expand to $17.6 billion about 4.8% of GDP by the end of the current fiscal year, registering an increase of $13.2 billion for the first three quarters of the fiscal year. 2022 compared to $275 million for the same period last year, which is roughly higher than the previous state bank. projected range of 4% of GDP.
The high import bill, driven mainly by international commodity prices and domestic demand, put pressure on the CAD and the Rupee accordingly. It is speculated that Pakistan may successfully complete the IMF’s seventh review and that thereafter a tranche may be released, followed by potential inflows from bilateral agreements, which should allow the rupee to recover in the short term , could settle around 182/dollar by June this year and then with an assumption of 4% annual depreciation, reaching 186/dollar by the end of December 2022.
However, global commodities, including oil, coal, copper, iron ore, steel, aluminum food products and natural gas, have posted abnormally high prices in the current year. . The price trends have started another “super cycle” shocking everyone, as it would take time for prices to take time for sustained surges linked to a period of rapid development. International oil prices peaked at a level last seen in 2014 after hitting a historic low in 2020 during the COVID-19 outbreak. Various other macroeconomic aspects such as inflation and the current account remained vulnerable to developments.
The repercussions of the Russian-Ukrainian conflict on the Pakistani economy are supported by rising world prices for commodities, including oil, LNG, coal and essential foodstuffs (such as wheat), with Pakistan being an importer net of commodities. The impact of the energy price shock on the main macroeconomic variables can be deduced from a two-step empirical analysis. The first step is to estimate the effect on the domestic price level and, subsequently, on the inflation profile. Among a number of factors contributing to the continued surge, defying all expectations such as: i) re-emerging oil demand during economic recovery and reopening of travel, ii) rare and distant restrictions from new variant COVID -19, iii) the Russia-Ukraine standoff, iv) OPEC+ adhering to the production rollout plan only cut 400,000 barrels each month rather than adding more production and v) the pullback of producers of oil to increase production to meet growing demand. LNG prices pose another risk to the domestic economy following the depletion of natural gas reserves which has intensified pipeline gas imports in recent years (393,342 btu/1,078 mmcfd in FY21) . Significantly, every $1/mmbtu increase in RLNG price is estimated to increase Rs 1.08/Kwh in RLNG-based power generation, increasing the country’s overall power generation cost. of 0.08/KWh, which is analyzed at around 0.6%. According to our calculations, each change of 1 USD/mmbtu in international LNG prices results in a change in the import bill of $393 million. Pakistan needs to encourage more foreign remittances to amplify it as the main source of capital inflows and is expected to remain the case in 2022. Regarding geopolitical contexts, it will remain one of the main drivers of inflows related with regard to the lifting of restriction channels in the regions. . Consequently, economic imbalances can be aggravated by an uneven global recovery. Remittances show a 7% increase on the year, with an increase of $23 billion in the first nine months of the fiscal year22. Associated flows have been resilient with a monthly average still above the $2 billion mark since June 2020.
Likewise, strong demand for technology-related services will continue to be an advantage for Pakistan. However, the growing trade deficit characterizes the exposure of the export-dependent economy to soaring commodity and raw material prices where manufacturers rely to produce goods at home. Meanwhile, growth in goods imports is expected to recover $70 billion in fiscal 2023, from an estimated $73 billion in fiscal 22, amid picking up domestic growth. As a result, the trade balance is expected to reach $39 billion in fiscal year 2023 from $45 billion in this fiscal year. Passing IMF reviews is expected to restore the confidence of all stakeholders, including other multilateral institutions such as the AfDB, World Bank and direct investors, which is likely to lower the cost of borrowing while using instruments such as sukuk and eurobonds which have risen recently. SBP is under pressure with reserves standing at $10.9 billion as of April 16, requiring a buildup of foreign exchange reserves to provide the much-needed cushion to ensure import cover remains above three months at the current time. less. Additionally, the USD is being boosted by safe-haven demand, high inflation and a hawkish Federal Reserve (Fed). The US Dollar Index may continue to move north following current circumstances to lift the Greenback in FY22-23, pushing the Rupee lower against the Greenback. Meanwhile, remittances are expected to play an important role in reducing the country’s current account deficit as the trade balance is expected to remain under pressure this year and domestic demand is expected to rebound faster. These are expected to continue to show resilience on this front, however, the outlook is not without risks. Additionally, the USD is buoyed by safe-haven demand due to high inflation and a hawkish Federal Reserve (Fed). If these growth-enhancing circumstances persist and continue to push the greenback higher in FY22-23, the US dollar index will continue to move north, continue to further weaken the Pakistani rupee against the greenback.
— The author is CEO of Model Steel and former Senior Vice President of Lahore Chamber of Commerce and Industry.