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Log InEconomy Of Pakistan With IMF
Pakistan is facing Balance of Payment Crisis as pressure on external account is increasing by each passing day. Despite of the fact that Exports and Remittances are increasing, numbers coming out for imports are even higher. As a result trade deficit is surging effecting Current Account of the country. Cost of living and doing business is getting more expensive as inflation is going double digit followed by discount rate. Dollars inflow is very important to avert such situation therefore positive assessment from International Monetary Fund (IMF) is imminent not only for final trench but to lodge Bonds in International Financial Markets. For said reason, Pakistan needs to fulfil some commitments with IMF out of which one is to raise tax collection and the second is to give State Bank of Pakistan more autonomy. On January 13, 2022, the Government of Pakistan passed the Supplementary Budget and SBP autonomy bill from the National Assembly where tax exemptions of Rs 350 Billion have been withdrawn together with asserting the power to SBP for curtailment of Refinance Facilities and complete ban to lend money to Government. Opposition says, a new wave of inflation is bound to hit Pakistan if these bills may be passed from Senate whereas the Finance Ministry stated that luxury items used by higher-income class are taxed with tax refund options while lives of the lower-income class will not be affected.
Now when we are discussing import figures which are turining to be very scary for trade account it is important to mention here that the statistics related to imports show some anomalies to be addressed by the government. November 2021 recorded the highest ever import figure which stood around Rs 8 Billion approximately. Half-year current fiscal calendar trade deficit stood at a dangerous figure of $24.79 billion where imports are increased 63% as compared to the same period of last fiscal year. Though in December 2021 imports recorded less than $1 billion from last month however increasing Trade Deficit making an overall picture of Pakistan Economy in a problem. Though Government officials suggest that the pace of Export is improving and by end of the current fiscal year exports to increase to $31 billion with Remittance to record at $32 billion, imports are making the situation troublesome for Twin Deficits. Imports mainly increased due to 3 most important segments of present times; Oil, Machinery and Vaccine.
Due to Coronavirus in the year 2020, industrial activities stopped for a longer period which impacted negatively on petroleum prices. Import bills of countries dependent on petroleum products fell in such period till then when world economy witnessed rebound. Now the price is the highest ever and impacting these dependent economies that includes Pakistan as well. State Bank of Pakistan took some measures in lockkdown period and gave support to the business community for economy to keep going. Among such measures control over interest rates, subsidized loan to the construction sector and Temporary Economic Relief Facility (TERF) to import machinery for the industry were such relifs which were bound to impact in years to come if not administered rightfully. Interest rate obliged borrowers to take more loans to make their industries a going concern in such global lockdown and no doubt it worked well during the period where Pakistan was open as compared to neighbours and the momentum is on the go. More activity means more imports if inputs are not available in the country especially for the export segment i.e. cotton bales if we may take textile as a major export segment. Further, through the TERF facility, industries booked a huge amount of machinery from relevant countries for improving their production efficiencies and adding other segments to increase production. Now in the current fiscal year, the payment of such imports is due and it is adding up the import bill. Other unavoidable imports are related to medical equipment and vaccines for Coronavirus treatment. Another segment that disturbed the balance of payment is spare parts and the import of cars. Now the government has taken measures and is making it a little difficult to buy a car. However, the same is negatively impacting over allied industries as margins are reducing.
As stated above securing IMF trench is very important and for said reason passing of SBP autonomy bill from Parliament is very important. Upon approval, SBP will be powerful to make its own decision about government borrowing from the central bank and refinance schemes. It will increase the finance cost of Government of Pakistan (GOP) making fiscal account to face pressure for more revenue collection. Another power is to decide about refinance schemes, which are presently available to exporters and precisely speaking to Textile Industry. It is to be noted that cotton prices locally rose to double from last year whereas prices in the international commodity market are already at an all-time high making input costs costly. Exporters can use 50 per cent of their export performance of the financial year to avail Export Finance Scheme where the rest of the working capital exigencies meet either by cash generation from operations or borrowing from Banks on the full cost. The same will be the issue with Capital expenditures for the import of new plants and machinery which is also available to exporters at subsidized rates. Now, when input cost has increased to double, and if SBP may curtail the refinance schemes, pressure on Net Profit Margins will be very obvious; making these industries think for alternatives.
After SBP autonomy, second most important condition from IMF to increase tax collection and for said reason mini budget is passed from National Assembly and send to Senate for approval. Withdrawals of tax exemption will compel industries to pass on the increased cost to consumers which will increase inflation. Mainly, these tax measures relate to the auto sector Federal Excise Duty is increased on cars according to its capacity. These measures will increase the end-user price and a burden on middle-class buying for cars up to 800 CC. Imported Vehicles are now subject to 17 per cent tax, which will support local assembling/manufacturing companies. General Sale Tax is being increased from 0 per cent to 17 per cent on the imported raw material at the import stage whereas end-product will be subject to the zero-rated regime, i.e. allowing input tax adjustment. This will increase the receivables of Pharmaceutical companies for which companies use funded lines from banks making borrowing costs increase. Proper government monitoring is required if such cash flow pressure may be passed on to consumers. GST is increased from 10 per cent to 15 per cent on cellular services that will make it expensive for end-user, which also includes the IT service professionals and education sector, especially when it goes online due to COVID19 lockdowns. Raw Cotton and sugar supplies to industries are also now subject to 17 per cent GST, which is negative for the textile sector and manufacturers of juices and beverages. Gross profit margins of Textile will be impacted as the input cost increases.
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