NationalVolume 14 Issue # 12

Adumbrations of an early recovery?

The trade deficit is falling sharply and inflation rose by just 0.4 per cent in the five months of the Pakistan Tehreek-i-Insaf (PTI) government. Exports have also started growing at 5.48pc during the period. Pakistan has made big strides in becoming regionally competitive again for textile exports. These may be signs of an early turnaround, but Pakistan will have to fight a long war against economic challenges of repaying mounting foreign debt amid rapidly declining foreign currency reserves in years to come.

The trade deficit in the first half of the current fiscal year shrank by 5pc to $16.8 billion on the back of numerous measures to squeeze imports but exports could not pick up pace despite a steep currency depreciation of 33pc in the last 12 months. According to the Ministry of Finance, the trade deficit, which stood at $17.7 billion in July-December 2017, shrank by 5pc to $16.8 billion in the corresponding period in 2018. Overall imports during July-December 2018, shrank by over 2pc or $700 million to $28 billion. The ministry said the trend was even more pronounced in respect of imports under the regulatory duties’ regime. The import value declined from $5.2 billion in July-December 2017 to $4.4 billion in July-December 2018, showing a contraction of 16pc.

The government’s policy measures have resulted in narrowing the trade deficit, decline in imports and increase in exports. However, the results are not very encouraging when it comes to exports, which is the key reason behind the declining non-debt creating foreign exchange earnings. The exports during the first half of the fiscal year were only $11.2 billion, higher by just 1.8pc or less than $200 million in the first half. It is despite the fact that the central bank, in consultation with the Ministry of Finance, has devalued the currency by 32.7pc since January last year. Pakistan’s last fiscal year’s trade deficit was $37.6-billion, which was the key reason behind the highest ever current account deficit of $18.9 billion.

According to another encouraging report, Pakistan is getting cheaper and it would provide more competition in textiles to Bangladesh, where the minimum wage stood at around $95, up from $63 in 2018, after a hike weeks before the election. The depreciation of the rupee has reduced the minimum wage to $107 from $124 in June, according to Renaissance Capital, an international investment bank. It observed how the gap between Pakistan and Bangladesh had lessened in the past year, considering that wages were around 100pc higher previously in the former and now are just 13pc higher. A year ago, wages in Pakistan were $136 vs $64 in Bangladesh and now the difference stood at $107 compared to $95 currently and it has made big strides in becoming regionally competitive again. It noted that existing factories were not about to pick up and leave Bangladesh, however, these figures indicate a potential change in future foreign direct investment (FDI) investment flows. According to the report, Bangladesh’s textile exporters will still attract a successful cluster of FDI, however, when wages exhibit such a tangible shift, investors may contemplate looking to Pakistan or other countries.

Saudi Arabia has also promised over $10 billion investment in Pakistan. Similar memorandums of understanding are expected with China, the United Arab Emirates and Malaysia over the next two months. Saudi Arabia is interested in Pakistan’s oil refinery, petrochemicals, renewable energy and mining. The $10b investment will be in addition to the $6b bailout package given by Riyadh to Islamabad during Prime Minister Khan’s visit to Saudi Arabia in October last year.

Pakistan’s unemployment rate has also gone down slightly while the literacy rate improved during the previous fiscal year 2017-18, the Pakistan Bureau of Statistics claimed in a report on the Labour Force Survey for fiscal year 2017-18. It said the unemployment rate stood at 5.8pc, down from 5.9pc in the previous year. The survey showed the national literacy rate had improved to 62.3pc in the fiscal year against 60.7pc in 2014-15. The unemployment rate in females decreased to 8.3pc from 9pc, while the rate increased in males from 5pc to 5.1pc. The number of employees has increased to 42.4pc from 38.7pc. However, the government’s estimates of unemployment are much lower than the projection of independent economists. Pakistan’s unemployment rate stands at nine percent, says Hafiz Pasha, an eminent economist.

Despite some positive signs, Pakistan’s economy faces huge challenges. Moody’s, a leading credit rating agency, anticipates that Pakistan would continue to fight tough against larger economic challenges, such as repaying mounting foreign debt amid rapidly declining foreign currency reserves during 2019. The US-based rating agency says Pakistan will have to repay foreign debt amounting to over 160pc of its foreign currency reserves in 2019. “Our external vulnerability indicator (EVI) reading for Pakistan and Sri Lanka exceeds 160pc for 2019, indicating that total public and private external debt due over the next year is larger than foreign exchange reserves,” it said in a commentary on “Sovereigns – Asia Pacific 2019.” In June 2018, the agency downgraded Pakistan’s credit rating from “stable” to ‘B3 negative’ after it found the country’s foreign currency reserves were insufficient to pay back its foreign debt.

Earlier, Fitch Solutions, another global credit rating agency, warned that Pakistan’s exports would likely to be impacted by a global trade slowdown and negatively impact its economic growth to fall to 4.4pc by the end of the current fiscal year. It highlighted that despite exports peaking near record-highs in rupee terms, they nosedived 12.8pc year-on-year in dollar terms during November last year and projected little chance of an increase any time soon, taking a global trade slowdown into consideration.

Most experts believe the country is virtually bankrupt. Most of problems afflicting the economy are structural in nature. Years of mismanagement, inaction and living beyond means have compounded them. The government will have to review its development and economic priorities to come out of the mess.