Economic Policies Under Scrutiny: Former Finance Minister’s Analysis

ISLAMABAD: The State Bank of Pakistan’s (SBP) strategy of acquiring dollars from the market, stemming from unofficial channels, to stabilize the rupee-dollar exchange rate and bolster foreign exchange reserves is unsustainable, according to Dr. Hafeez Pasha, the former finance minister.

Dr. Pasha voiced these concerns during his appearance on Aaj TV’s programme ‘Paisa Bolta Hai with Anjum Ibrahim’.

He also highlighted the contraction in the large-scale manufacturing (LSM) sector, coupled with declines in key agricultural yields such as a 28% drop in cotton production. He projected that the nation is unlikely to reach the 2% Gross Domestic Product (GDP) growth rate, falling short of the 3.5% target for the ongoing fiscal year.

Fitch anticipates the Pakistani rupee to settle at 285 against the US dollar by June and further depreciate to 295 by the close of FY26.

Concerns Over Export Incentives

Dr. Pasha contended that the practice of sourcing dollars from the market to maintain the rupee-dollar parity between 278 and 280 is not a viable strategy, as it neglects the need for export incentives. He pointed out that the government’s agreement with the International Monetary Fund (IMF) mandates exporters to pay a 29% tax on their total export revenue, a significant increase from the previous 1%.

He lamented the absence of tax breaks and incentives for exporters, contrasting this with regional competitors like India and Bangladesh, which actively incentivize their export sectors. He emphasized that if tax relief cannot be provided, the government should at least allow for a market-based exchange rate. He observed that State Bank of Pakistan (SBP) data indicates the Real Effective Exchange Rate (REER) has exceeded Rs100, suggesting that the local currency is overvalued.

GDP Growth and Poverty

Dr. Pasha emphasized the importance of GDP growth as an economic indicator, noting it was approximately one percent in the first quarter of the current fiscal year. He stated that Pakistan has not achieved an average of 3% GDP growth in the last five years, marking the lowest rate in the nation’s history.

He added that with a 2.5% population growth rate, per capita income has decreased, pushing about 44% of the population below the poverty line. He also stated that the unemployment rate, previously around 6-6.5% according to labor surveys, has surged to 22% today, which he claims is the highest in the country’s history. The number of unemployed young individuals has reached 20 million, a cause for concern.

Inflation and Fiscal Imbalances

Dr. Pasha noted a significant reduction in inflation, remaining below one percent in March. However, he pointed out that core inflation, which offers a clearer picture of demand and supply dynamics, remains between 6-8 percent.

The disparity between core inflation and the overall Consumer Price Index (CPI) is attributed to fluctuations in food and fuel prices.

Significant decreases were observed in wheat and flour prices, around 34%. He attributed this decline to the government’s suspension of procurement processes and support prices under pressure from the IMF, leading farmers to sell their produce at lower rates. He cautioned this could lead to reduced sowing next year, potentially causing shortages.

He questioned the Pakistan Bureau of Statistics (PBS) data indicating a 15% decrease in fuel prices, arguing that the government maintained stable prices to pass costs onto electricity consumers and allocate funds for Balochistan’s development. He suggested that the PBS data on inflation is questionable. He stated that the current account improved due to remittances, but the trade deficit in goods and services widened. He elaborated that the financial account in the balance of payments is in a negative state, with foreign outflows exceeding inflows for debt repayment.

“Ultimately, even with a positive current account, the overall balance of payments will not significantly improve compared to the previous year and may even worsen,” Dr. Pasha cautioned.

He contended that economic stabilization is coming at a high cost, including losses for farmers and a substantial decline in investment, which is at a 25-year low.

Foreign Inflows and Investment Climate

Regarding foreign inflows, Dr. Pasha cited Economic Affairs Division (EAD) estimates, projecting around $19.5 billion in inflows for the current fiscal year, including $9 billion in rollovers from China and Saudi Arabia.

He noted that new inflows were expected to be $10 billion, but the country has received only about $5 billion in the first nine months, which is less than the amount repaid.

According to SBP data, foreign inflow is negative, which is a concern as reserves have decreased to less than $10.5 billion, signaling a fragile economy. He stressed that there is no basis for overconfidence.

Dr. Pasha asserted that Pakistan would remain vulnerable unless exports increase, noting that the widening trade deficit is a long-term indicator of Pakistan’s position.

Regarding the global tariff war, he said that the USA is the only country with which Pakistan has a substantial surplus, while Pakistan faces a significant deficit with China, around $12-$13 billion. He stated that the trade war would have implications for Pakistan.

He reported that direct and portfolio foreign investment was around $1.4 billion in the first nine months of the current fiscal year, the same as the previous year. He noted that expectations of $10-$15 billion in investment following the establishment of the Special Investment Facilitation Council (SIFC) have not materialized.

Regarding upgrades by rating agencies, he stated that Pakistan has a score of only 18 out of 100 and remains far from investment grade.

He mentioned that the government agreed with the IMF to complete the privatization of PIA along with two DISCOs, but this has not yet been achieved. He suggested that the government may offer improved terms and incentives, including new aircraft procurement with sales tax exemptions, to ensure the success of PIA’s privatization.

IMF Review and Revenue Shortfalls

Regarding the IMF review, he said that economic indicators until the end of June would be considered, with some indicators already trending negatively. He reported that the Federal Board of Revenue (FBR) experienced a shortfall of over Rs 700 billion in the first nine months of the year, expected to reach Rs 1000 billion by the end of June, indicating that the target set for the current fiscal year would not be met.