Steps taken to tackle economic challenges of Pakistan

BusinessSteps taken to tackle economic challenges of Pakistan

Pakistan is facing macroeconomic challenges owing to sharp rise in global commodity prices, supply disruptions, higher shipping costs and Russia-Ukraine conflict at the start of 2022. The elevated global commodity prices (especially of energy) not only increased pressure on foreign exchange reserves and exchange rate through inflating Pakistan’s import bill but also fueled inflationary pressures in the economy.

The Current Count Deficit (CAD) widened to US$ 17.4 billion (4.6 percent of GDP) and the CPI Inflation rose to 12.2 percent in FY22. The exchange rate depreciated by 23.1 percent in the same period.

Further, the US monetary tightening (increase in Fed rate from 0.5 percent in March 2022 to 4.0 percent in November 2022) and consequent US. The dollar‘s broad-based strengthening against other currencies and domestic political uncertainty added to these challenges.

The following are steps being taken by the government to tackle the economic challenges like increase in inflation, decrease in foreign exchange reserves, depreciation in Pakistani rupee, & increase in current account deficit;

Steps taken by the State Bank of Pakistan (SBP)

Along with monetary policy tightening, the SBP has also taken a range of administrative measures to contain domestic demand in a bid to ease inflationary pressures and contains current account deficit. These are briefly discussed as follows:

Monetary policy tightening: The SBP has raised the policy rate by 800 basis points since September 2021 to 15.0 percent. In addition, the SBP increased the Cash Reserve Requirement (CRR) by one percentage point to 6 percent to slow the pace of credit expansion in the economy.

Upward revision in EFS and LTFF rates: To improve the monetary policy transmission, the SBP increased the mark up rate for financing under EFS from 5.5% p.a. to 7.5% p.a.; and under LTFF from 5% p.a. to 7% p.a. Further, the rates of EFS and LTFF will be linked with SBP Policy Rate.

Tightened macro-prudential regulations: The SBP tightened consumer finance regulations, particularly related to personal loan and auto finance, to contain demand for import of automobiles and other durables.

The SBP has also tightened regulations for exchange companies regarding FX purchases by individuals, including biometric requirement and imposition of daily and annual limits for FX purchases.

Tariff and non-tariff restrictions on imports: In Finance (Supplementary) Act, the government increased taxes and duties on imported and locally assembled cars to curb demand.

Imposed cash margin: The SBP imposed 100% cash margin on 114 tariff lines on 30th September 2021 (bringing cumulative total to 525 tariff lines). This requirement was extended to 702 tariff lines along with stringent reporting requirements for banks to report CMR on April 7, 2022.

Early realization of Export Proceeds: The SBP has shortened the time period allowed for realization of full value of goods exported by the due date or a maximum of 120 days, whichever is earlier.

Subsidized Rupee-based Discounting: In order to incentivize exporters and ease pressure off PKR in the foreign exchange market, rupee-based discounting of export bills/export receivables has been introduced by SBP at subsidized rates.

Market based flexible exchange rate continue to play its role as shock absorber: With widening of the Current Account Deficit, exchange rate depreciated by around 28.8 percent since end June 2021. The damping impact of the depreciation is visible in the slowdown in imports.

These policy measures combined with fiscal consolidation and administrative measures announced by the government (ban on non-essential imports, adjustment in energy prices, etc.) have proved instrumental in slowing domestic demand as reflected by high-frequency sales indicators (cement, POL, and auto sales).

As a result, the CAD declined for the second consecutive month to US$ 0.3 billion in September 2022.

Looking forward, with expected ease in global commodity prices amid projected slowdown in domestic economic activity, the Current Account Deficit is projected to remain contained in the coming months. However, despite significant slowdown in domestic demand, the CPI inflation is still high due to recent flood-related crop damages and supply chain disruptions. In October 2022, the CPI inflation is recorded at 26.6 percent. Given that domestic demand has started to moderate and global commodity prices have eased, inflation is expected to start falling in coming months.


Note: The above information was shared with the National Assembly by the Minister for Finance and Revenue Muhammad Ishaq Dar on November 18, 2022.

Mati-Ullah is the Online Editor For DND. He is the real man to handle the team around the Country and get news from them and provide to you instantly.

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