The International Monetary Fund (IMF) was established in 1944 to promote monetary stability, in particular exchange rate stability among member countries. Since then, the IMF has evolved as the most important multilateral financial organisation and has assumed a dominant role in the process of macro-economic stabilisation in the world. Pakistan is currently going through its 23rd IMF programme, worth six billion dollars, which was approved on July 3, 2019, to reduce economic vulnerabilities and generate sustained and balanced growth.
How It Began
In FY2018, Pakistan was compelled to seek IMF assistance due to a massive current account deficit worth $19.9 billion, amounting to roughly 6.1% of the country’s GDP, while the State Bank of Pakistan (SBP) only had foreign exchange reserves worth $9.7 billion. With a GDP growth rate of 5.5% in the same year, Pakistan recorded an import bill of $60.8 billion, which mainly included energy, machinery, food products, transport, raw cotton and synthetic yarn. This meant that the economy had to cover this amount through exports and remittances (the primary drivers of dollar earnings). However, the economy could only generate $24.7 billion worth of exports and $19.9 billion worth of remittances that year.
The economy then switched to a market-determined exchange rate (before the IMF programme commenced) going from Rs 122 per dollar to Rs 160-170 per dollar it is now hovering around Rs 155 per dollar. This devaluation led to a massive surge in inflation, increase in interest rates to 13.25%, economic slowdown (1.9% in 2019 and -0.47% in 2020), a decrease in real wages and per capita income – the burden borne most by the lower and middle-income segments
After going through crucial and costly adjustments required to achieve macro-economic stability as per the IMF requirements, the economy has managed to overcome the deficit challenge, but it may be short-lived. As per provisional data, the import bill for July-May 2021 has touched $49.8 billion and could end up at around $55 billion by June 2021. Export of goods for July-May 2021 has been reported at $22.5 billion and could end at around the $25 billion mark. As per the SBP, remittances continue to surge and were recorded for July- April 2021 at $24.2 billion and could amount to $29 billion by June 2021.
The problem stays there. Despite the massive devaluation and concessions given to the export sector, the capacity of the export sector to grow beyond $25 billion seems unlikely and remittances are now the single largest source of dollar earnings, leaving export earnings behind. In May 2021, the import bill was reported at $5.09 billion, owing to increasing oil prices, food imports and resumption of economic activity. The government has forecast a growth of 4.8% in FY2022 and six percent in FY2023. This, along with a bull run in oil prices could further increase the pressure on the import bill, which could end up in the range of between six to seven billion dollars by FY2023 monthly – unless there is significant import substitution – translating into $72-84 billion annual imports. Assuming Pakistan can sustain the surge in remittances to average around three billion dollars monthly, there is still a need to achieve annual exports to cross the $40 billion mark.
An interesting case is Bangladesh’s economy that has attracted global attention for its remarkable economic progress. Bangladesh relies on the Ready-Made Garment (RMG) industry which accounts for 84% of its exports. In 2011, RMG exports for Bangladesh were worth $14.6 billion and by 2019 they had crossed $33.1 billion, achieving a compound annual growth of 7%. In comparison, given the latest Pakistan Bureau of Statistics data, textile exports for Pakistan have increased 17.3% year-on-year for July-April 2021, as local manufactures were able to capture additional shares in the global markets due to order cancellations from China and the inability of other exporting countries to fulfil orders due to lockdowns. However, total textile exports remained at $12.6 billion for the period of July-April 2021 and are expected to finish at $15 billion. Pakistan’s RMG exports on the other hand, for the period July-April 2021, were recorded at around $2.5 billion and are expected to reach three billion by June 2021 – a mere fraction compared to Bangladesh’s exports in RMG.
Like all other emerging market economies, Pakistan’s economy must grow at seven percent or above to generate employment opportunities and improve its economic well-being. However, the impediment to achieve and sustain this growth is the external sector, which cannot be achieved unless there is a drastic rise in exports. The focus should be on the need to avoid future IMF programmes and the painful adjustment process needed to move the economy back on track. There is an urgent need to further support the export sector to compete on the global stage or to look for other export avenues that can generate earnings beyond the $40 billion mark.
Ali Jamshed is a lecturer for undergraduate Accounting and Finance courses and an A-Level Accounting teacher with research interests in economic policy and financial sector management.