Ukraine could tip Pakistan into financial crisis

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PESHAWAR – The International Monetary Fund’s $6 billion bailout package for Pakistan is in jeopardy after Islamabad announced new fuel and energy subsidies and unveiled a tax amnesty package amid Ukraine crisis feared that the country’s current account deficit could push the country’s current account deficit to an all-time high of $20 billion.

Analysts say international ratings agencies have warned that three Asian countries – Pakistan, Sri Lanka and Cambodia – could default on debt repayments if oil, coal and commodity prices continue to rise soaring in world markets.

Amid global outcry over the invasion of Ukraine and sanctions against Russia, Pakistani Prime Minister Imran Khan signed major deals to import natural gas and wheat from Russia during his recent visit to Moscow .

Khan became the first leader to strike trade deals with President Vladimir Putin’s beleaguered government, which in recent days has been the subject of international condemnation at the United Nations and sanctions mimicked by US and European allies like Singapore, Japan and South Korea.

Khan’s provocative decision to visit Russia coincides with a major gas and food crisis that is pushing Pakistan to the brink of economic collapse amid rising global market volatility and rapidly depleting foreign exchange reserves, which are now mainly composed of loans from the United Arab Emirates, Saudi Arabia and China. .

Pakistan’s Finance Ministry’s monthly economic outlook report released on Feb. 28 warned that the Ukraine crisis was a huge risk factor for Pakistan’s economy. He said the tensions could push international oil and food prices further beyond their current highs.

“The main risk to the Pakistani economy is the deterioration of the downward correction in inflation and the current account balance,” the report said.

Russian President Vladimir Putin and Pakistani Prime Minister Imran Khan. Picture: Facebook

The price of coal is soaring

For example, the price of coal on the international markets reached an unprecedented level of 310 dollars per ton. Pakistan depends on coal imports to fuel its power stations and the crucial cement industry. Analysts predict that a shortage of electricity and cement in the country over the next few weeks could trigger a new wave of inflation in Pakistan.

“It is a very difficult and alarming situation. We had forecast a trade deficit of $28 billion for the whole year, but we ended up racking up $32 billion in just over eight months,” political scientist, economist and financial analyst Farrukh Saleem told Asia Times. Pakistani based in Islamabad.

He said that by the end of the fiscal year in June, the trade deficit would be around $50 billion, which he said will be very difficult for the government to close. “I am unable to understand where the money would come from,” he said.

Analysts believe that the Ukrainian crisis will multiply Pakistan’s already numerous economic difficulties. Pakistan, they said, needs new solutions to stop the growing import trend. Some say that if the war continues, Pakistan will be in serious financial crisis with reserves falling below minimum adequacy levels.

Hafeez Pasha, an economist and former Pakistani finance minister, revealed on a recent talk show that the country desperately needs to reduce its bloated import bill by at least $16 billion to cope with external challenges.

He said the current account deficit was heading towards the $20 billion mark, or 6% of gross domestic product (GDP), for the current fiscal year.

Oil, coal and commodity prices, he said, were stuck in an upward trend in international markets, which will put further pressure on the current account deficit in the coming weeks.

Workers unload gas cylinders from a truck at a market on the outskirts of Islamabad on September 2, 2020. Photo: AFP / Farooq Naeem

“The country is heading towards a severe financial crisis as foreign exchange reserves would start to deplete at an unprecedented rate and could run out to the lowest level of $7 billion if imports are not contained,” did he declare.

Pakistan’s current account deficit hit a record high of $2.6 billion in January 2022.

Data released by the Pakistan Bureau of Statistics on Thursday revealed that Pakistan’s trade deficit reached $31.959 billion, an increase of 82 percent in the first eight months (July-February) of the current financial year.

“The $32 billion trade deficit is the highest in eight months, both as a percentage of GDP and in absolute terms. Yesterday’s hastily prepared amnesty will further worsen trade and current account deficits, both already on track to be the highest on record,” said Miftah Ismail, former Pakistani Finance Minister and Secretary General of the Pakistan Muslim League-N (PML-N) Sindh. Chapter.

He noted that the government raised gasoline and electricity prices a few days ago, then abruptly announced a reduction in subsidies. “Has the economy changed in recent days or has politics changed? PTI never has the money to relieve people, but to save Imran Khan’s job, they find a way,” he remarked.

On February 28, Prime Minister Khan unveiled a major relief package including measures to reduce oil prices and electricity tariffs amid rapidly rising global inflation.

However, opposition parties called the relief package a populist election ploy to boost Khan’s declining popularity. Khan announced a reduction in electricity tariffs and fuel prices in defiance of his government’s commitment to the IMF, they said.

“The government has decided not to increase petrol and diesel prices and electricity tariffs until the next budget,” Khan said in his televised address to the nation.

Prime Minister Imran Khan. Photo: AFP/Mohammed Reza/Anadolu

A day after the relief package was announced, Khan offered his third amnesty package to allow investors to invest their undeclared money in new industries without declaring the source of their investment. The IMF, which had previously obtained firm assurances from the government that no further amnesties would be announced, apparently was not notified.

An IMF team will raise the issue of the subsidy package and amnesty with Pakistani officials during its upcoming talks on the seventh review of the Expanded Financing Facility (EFF) program.

In a related development, the Petroleum Companies Advisory Council (OCAC) – an umbrella organization for oil companies – warned of an impending oil crisis should the government keep domestic prices frozen until the next budget, in line with at the announcement of the Prime Minister.

In a letter to the Oil Ministry, OCAC demanded payment of price differential claims stemming from recent price cuts and warned that if a mechanism is not finalized, an oil crisis will cripple the country.

“The decision to cut utility prices and offer amnesty comes on the eve of an IMF review. I wonder what these conversations will look like given that the steps are in total conflict with what was agreed by the IMF,” said Uzair Younus, director of the Pakistan Initiative at the South Asia Center of the AtlanticCouncil.

Younus claimed that the government would pay for the subsidies through loans, which the people would eventually repay, along with the cost of interest and currency depreciation.

Farrukh Saleem said it was not the first time that the government backtracked on its commitments to the IMF.

“In February 2021, Khan’s government promised to collect 610 billion rupees ($3.22 billion) from oil tax and electricity tariff adjustment. After getting a $500m payout, they backtracked and the new finance minister refused to follow the steps his predecessor had promised to the IMF,” Farrukh said.

This time, he said, the government had agreed in early January this year to levy an additional 310 billion rupees ($1.7 billion) on oil tax, but again failed to honor. this commitment by implementing a fuel price reduction.

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