The areas of focus for the
economy of Pakistan, as things stand, the current account deficit which has led
to the economy facing a plethora of issues. The deficit currently stands at a
staggering $6.4Bn, with export showing a gradual increase but imports
out-pacing them every step of the way. A long standing issue for the economy
has been its inflation, with the CPI clocking in at 4.57% in the last month
which is the highest for the past 6 months or so. The major driver for this
amplified inflation figure is the imported inflation which has always been a
mainstay for the economy of Pakistan, the hike in the prices of energy products
and volumetric increase of 29% in petroleum imports explain the inflation
figure to quite an extent. Oil prices have reached a 5year high and indicators
surrounding this price increase, such as the political instability in the
Kurdish oil producing states, the anti-corruption rally led by the Saudi prince,
plus the imminent sale of 5% of ARAMCO’s equity, coupled with the fact that U.S
production and the increase in oil rigs set up has plateaued transferring the
pricing power back to Saudi Arab and other CPEC countries, means that this
increase in oil prices will persist, at least for the foreseeable future.

 

The depreciation of PKR is
one of the many steps taken by the government of Pakistan to correct this
imbalance. The classical J-curve theory implies that a devaluation of the
currency of the importing country would only worsen the CAD in the short run
but its fruition would be visible in the long run, but not to forget with
Pakistan’s dependency on imports and the high inelasticity of demand for
imported goods, that the economy has lays claim to the fact that either this
devaluation would work with a considerable lag or the devaluation needs to
really extensive with the value of rupee deteriorating extensively.
Furthermore, the government has opted for other counter measures too with
actions such as curtailment of RFO imports and imposition regulatory duties
serving as direct measures, and the issue of euro bonds and sukuks providing
cues for indirect measures taken by the government to dampen the money supply
in the economy and bring the aggregate demand down.

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