The Pakistan government this week acknowledged the issue of overheating of the economy as trade deficit and import bills--which crossed $2 billion and $12 billion respectively in last two months--continue to grow dramatically over the last few months with an unsustainable pace and now decided to introduce measures to cool down the economy. 

The painful admission exposed the claims the government had been making for at least five months that the economy was on the right track, citing growth figures while ignoring ballooning trade deficit which touched $3 billion in July and crossed $4 billion last month--a rise completely unsustainable in long run. 

In the last fiscal, which ended in July, it recorded a whopping trade deficit of around $30 billion-- an increase of 32 percent from a year a before. Booming remittances, however, helped the government to finance these bills but it seems to have peaked its limitation this weak.

“If [the new] measures are not taken, the economy could grow at more than 5 percent rate and this is the time to control the growth rate,” Finance Minister Shaukat Tarin was quoted as saying by The Express Tribune newspaper.

Contradicting his earlier claim--that the economy can sustain 6 percent growth, he said on Wednesday that they could be exchange rate-related issues and overheating if the growth surpasses the 5 percent rate.  

However, much of the crisis is of the government’s own making. Since the last year, the government aggressively adopted expansionary fiscal policies like rolling out heavy cash subsidies, low-interest rates to boost demand amid the Covid-19 downfall. Several warnings were ignored over the months related to the problem which ultimately started taking shape of a crisis.

On the effects of these policies, Kurram Hussain, a renowned business and economy journalist in Pakistan, writes in an op-ed in Dawn, “What began as a stimulus to mitigate the impact of the Covid lockdowns of a year ago had turned into a gravy train of relentless elite consumption.”

Tarin hinted that government will start rolling back its expansionary policies now.  

On Thursday, the government cut short the budget to one-fifth for the Kamyab Pakistan Plan where it had initially planned to disburse interest-free loans worth $5 billion over the next two years. The International Monetary Fund (IMF) earlier this month had also warned the government to scale back the plan.

Introduction of cash margins –where the importers are required to deposit cash in dollars in advance—and regulatory duties are considered import restrictive measures that are usually discouraged by the International Monetary Fund (IMF).

The import bill also grew dramatically because the country has had a shortfall in food production. The import of wheat--the fourth tender was approved on Thursday--also exacerbated the problem. 

These measures also come weeks before Islamabad is scheduled to restart negotiations with the IMF over the resumption of the $6 billion package. The IMF suspended the program as Pakistan violated some fiscal policies---raising electricity tariffs and scaling down government spendings-- recommended improving state finance. 

(SAM)