The myths of economic success propagated by PTI spokesmen, like collection of unprecedented revenues, revolutionary impact of increase in exports and large foreign exchange reserves are getting unraveled one after another.
The PM claimed that his government has significantly raised the collection of revenues that would allow the PM to spend more on social welfare while keeping down petrol prices and power rates. The revenue increase has taken place at the import stage and due to indirect taxes. Goods with high custom duties that included luxury items like packed foods, animal foods, master baths, cosmetics,hatchbacks and luxury cars were allowed to be imported leading to unsustainable imbalances. While the PM congratulated himself at the rise of exports these were outstripped by a rise in imports leading to a current account deficit of more than $12 billion between July 2021 and February 2022. Indirect taxes contributed to higher prices, including those of sugar and edible oil, causing social unrest.
The government spokesmen had all along trumpeted the increase in foreign exchange reserves. With the repayment of Chinese loans and regular debt servicing, the reserves dropped to $12.047 billionn during the week ending on March 25, leaving the next government insufficient foreign exchange to cover two months imports. The drop in foreign exchange reserves was followed by the rupee plunging to a historic low of Rs183.70 against the US dollar in the interbank market. This would add to inflation, particularly making imports costlier.
As pressure from the opposition increased, the PTI government resorted to populist policies to help Imran Khan politically, but were bound to have a damaging long term impact. Towards the end of February the government slashed petrol prices by Rs10 and the power tariff by Rs5 as part of relief measures for the public. It was promised that there would be no increase in petrol and electricity prices until the next budget. The new government will face opposition if it reverses the measures.
The government succeeding the PTI administration will inherit mind-boggling economic challenges. There is a significant outflow of foreign investments noted by the SBP. The new government will need external financing to continue to meet its obligations given the pressures on its foreign-exchange reserves. For this it will have to commit to implementing unpopular reforms.
