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- A staff-level agreement has been achieved by the International Monetary Fund (IMF) to complete the seventh and eighth reviews of Pakistan's Extended Fund Facility (EFF).
$1,177 million would be made available to Pakistan, for a total payment of $4.2 billion, with the Executive Board of the IMF's approval. This will provide much-needed economic stability and, as a result, lessen volatility in the Pakistani rupee's relation to the US dollar.
Priorities for policy include strict efforts to lower the government's borrowing requirements, changes to the electricity sector that lower circular debt, a proactive monetary policy to lower inflation rates to more manageable levels, and strengthening and improving governance.
To keep its promises and the programme on track, the government will need to put up a lot of work.
Even while the IMF programme is probably going to give the currency rate volatility and uncertainty seen in recent months a much-needed reprieve, efforts must be made to guarantee that Pakistan is able to break free from the cycle of having to approach the IMF every few years.
The loss of production is one of the main causes of this vicious cycle. Pakistan has lagged behind in terms of productivity growth over the past two decades compared to nations like Vietnam and Bangladesh.
As a result, the government has been forced to rely on loans provided by multilateral lenders and friendly states due to the lack of exports, low levels of trade openness, and local manufacturers' incapacity to compete on regional and international markets.
Global exports climbed by more than 20% in 2021, according to data from Trademap.org, a service of the International Trade Centre. The highest-ever recorded exports from Pakistan were reported at $31.8 billion in FY22. According to the Pakistan Bureau of Statistics, it climbed by 25.5% from the amount in the previous fiscal year (PBS).
Approximately 5.8% more than in June 2021 and 9.9% more than in May 2022, the amount of exports in June 2022 was $2.9 billion.
Additionally, there was an increase in imports, which were valued at $80 billion in FY22, or 41.9 percent more than in FY21. The value of imports in June 2022 was $7.7 billion, which was up 13.9 percent from May 2022 and 21.6 percent from June 2021.
The abrupt increase at the conclusion of FY22 may be explained by the import prohibition that went into force at the beginning of FY23. This, however, defeats the import ban's entire intent, which was to stop the flow of funds out of the country at the height of the financial crisis.
High economic expenses have resulted from the interruptions caused by the import prohibition. In FY22, the trade deficit was estimated at $48.3 billion, which is 55.3 percent more than the estimate for FY21.
The rapid increase in imports of goods from the petroleum category was one of the main causes of the trade deficit's rise. In the first 11 months of FY22, the imports in the petroleum group increased year over year in dollar terms, according to the most recent data from PBS available at the time of writing.
None of the other groups noticed a rise as significant. While the quantity climbed by 26%, the imports of petroleum products increased by 126,2 percent year over year.
The trade gap was made worse by the fact that rises in gasoline prices at the gas station did not keep pace with increases in the price of commodities on the global market. A more effective approach for Pakistan is required, one that includes trade reforms that can strengthen the connections between exports and imports.
Recently, the Economic Advisory Group (EAG) published their book, "Trade Connectivity." The book emphasises the advantages of broader trade opening for Pakistan as it would support economic growth, promote national welfare, and improve consumer welfare by lowering costs and increasing the variety of available items on the home market.
The book mentions that one of the biggest issues is that not enough people are participating in global value chains (GVCs).
Compared to Thailand, Vietnam, and India, Pakistan's overall involvement in GVCs is considerably lower at about $6 billion. These latter nations reported involvement in GVCs of at least $90 billion in 2017.
GVC involvement, which entails the movement of products across numerous borders, is accomplished through either backward or forward links. In the former, imported inputs are transformed locally into exports, whereas in the latter, domestically produced commodities are transformed into exports in the importing country.
Pakistan and India have concentrated on creating forward links by exporting intermediate commodities, while Southeast Asian nations have created backward links.
Participation in GVCs has been greatly aided by the Asean nations' declining import duties. Free trade agreements (FTAs) are being signed by several nations with their main trading partners.
FTAs can help exports, but they can also be crucial for obtaining inputs from significant suppliers. The book, for instance, emphasises how Vietnam is dependent on imports from nations with which it has established a free trade agreement.
Additionally, Vietnam has implemented a number of non-tariff measures (NTMs) to strengthen the connections between its producers and important markets.
NTMs entail the use of established specifications in the manufacture of items, which can enhance the quality of the finished product while also preventing the importation of hazardous or low-quality goods.
Vietnamese goods are therefore likely to meet certain requirements and norms. Unfortunately, the Pakistani government has not embraced NTMs, and as a result, its producers are probably unable to access the more developed and advanced markets.
The author is a research fellow at CBER and an assistant professor of economics at the Institute of Business Administration in Karachi.
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