Shortage economy
Evil games are being played in the political arena when SPB is left with $12 billion, just enough to buy two months’ worth of imports.
When Pakistan needs $32 billion just to stay afloat. When our trade deficit is about to hit $45 billion. When our current account deficit is about to hit $20 billion. When inflation is at 13 percent.
Our single-biggest challenge right now is: rapidly depleting foreign exchange reserves. In economic terms, a shortage is a “condition where the quantity demanded is greater than the quantity supplied.” Question: Why do shortages occur? Three causes: increase in demand, decrease in supply or government-imposed price ceilings. Red alert: our current trajectory is taking us to a ‘shortage economy’.
Dollar shortage: In the first eight months of the current fiscal year, our imports came in at $52.5 billions and exports at $20.5 billion. What that means is-in simple terms-that the supply of dollars in Pakistan was $20.5 billion and demand at $52.5.
In essence, the quantity demanded is much higher than the quantity supplied. Result: shortage of dollars. The projected annual imports hover around $75 billion and exports around $31 billion with a projected trade deficit of $45 billion. Result: a continued shortage of dollars.
This elevated level of trade deficit is not sustainable. This demand-supply of dollars is not sustainable. Foreign direct investment slipped 33 percent remittances, however, were up 8 percent year-over-year in February. This means further devaluation of the rupee.
Pakistan’s gross external financing requirement stands at $32 billion and our external debt servicing is projected at $17 billion.
Lo and behold, as of March 25, net reserves with SBP were $12 billion. Red alert: Net reserves with SBP now cover less than 2 months of imports. Result: there’s going to be a severe shortage of dollars.
Energy shortage: On February 28, PM Imran Khan announced a Rs10 per liter cut in the price of petrol.
What that means is that in order to maintain the prices of petroleum products at their current level the government will have to pump in up to Rs35 per liter or a massive Rs220 billion. On February 28, PM Imran Khan announced a Rs5 per unit cut in the price of electricity-that’s an additional Rs140 billion.
The government really does not have the billions and if the government does not pay the billions to the Oil Marketing Companies (OMCs)-as Price Differential Claims-then the OMCs will cut down their imports. Result: shortage of petroleum products.
Red alert: Circular debt at PSO, the state-owned petroleum distributor, has hit Rs658 billion. PSO has to import 17 fuel cargoes for April including 7 LNG cargoes, 3 furnace oil, 6 diesel and 5 motor gasoline cargoes.
Remember, shortage is a “condition where the quantity demanded is greater than the quantity supplied at the market price.” The demand for natural gas is estimated at 6 billion cubic feet per day while we produce 4 billion cubic feet per day. Lo and behold, in the next four years local gas production is projected to fall from 4 billion cubic feet per day to 2 billion cubic feet per day. On top of that, 126 billion cubic feet of gas is stolen every year (an economic value of almost $4 billion). On March 7, the price of natural gas hit a historical high of $380 per megawatt-hour (that’s the equivalent of $600 per barrel of oil).
On March 26, Gunvor, the Singapore-based commodity trading company, sent ‘refusal notices’ stating that the “trader would not be able to ship four LNG cargoes scheduled for delivery on April 15, May 14, June 4 and June 9.” Result: shortage of gas in Pakistan.
Food shortage: At an average consumption of 115 kg of wheat per year we need around 28 million tons.
Over the past 3 years, Pakistanis have gone through double-digit food price inflation in-tandem with declining incomes resulting in a lot more Pakistanis becoming food insecure.
According to the World Food Program (WFP), “approximately 43 percent of Pakistanis are food insecure and 18 percent of those have acute food insecurity.” Globally, wheat prices have almost doubled since the Russo-Ukrainian War.
When wheat prices rise, food prices go through the roof. Food insecurity generally has two root causes: lack of availability and/or affordability issues. Some three years ago Pakistanis used to buy their annual wheat requirement for Rs850 billion.
This year, Pakistanis would have to dole out a hefty Rs1,800 billion for the same. For the record, the phenomenon of food insecurity in Pakistan is more of an affordability issue than the availability of food stuff.
The real issue is if the government has a team working hard on developing mitigation strategies in view of the upcoming dollar, energy and food shortages.
The other real issue is if our foreign policy is national economic interest driven or not. Someone intelligent once said, “The biggest shortage of all is the shortage of common sense.”
