Pakistan faces a complex economic landscape marked by vulnerabilities in its balance of payments, as highlighted by a recent assessment by Moody’s Investors Service. This evaluation underscores the nation’s heavy dependence on exports, the inadequacy of foreign direct investment, and the persistent struggle to navigate external shocks.

Moody’s reevaluation of Pakistan’s susceptibility doesn’t come as a surprise. With exports making up a mere 10.5 percent of Gross Domestic Product (GDP), Pakistan stands as the most vulnerable South Asian nation to balance of payments crises. Bangladesh outperformed Pakistan, with exports contributing to 12.9 percent of GDP, while Sri Lanka recorded 21.5 percent, and India reached 22.4 percent.

Moody’s Investors Service, the international credit ratings agency, highlighted that Pakistan and Sri Lanka, due to low exports and a lack of foreign direct investment (FDI), are among the South Asian countries most exposed to balance of payments (BoP) crises. The agency emphasized that low levels of trade openness and FDI constrain long-term growth prospects, leading to heightened social risks.

The report singled out Pakistan and Sri Lanka as the most vulnerable to BoP crises, citing their significant pressures arising from very low exports and FDI, compounded by weaker policy management and higher political risk. In contrast, India was deemed the least vulnerable, boasting a larger and more diversified export sector and superior macroeconomic policy management.

Moody’s attributed hindrances in the export sector to restrictive trade policies and poor infrastructure. Bangladesh, Pakistan, and Sri Lanka were noted to have weaker infrastructure compared to India, resulting in higher trade costs and limited market access due to fewer trade agreements. It predicted that low trade openness would impede growth potential, job creation, and exacerbate social risks across all four countries. Bangladesh, India, and Pakistan were anticipated to face greater challenges than Sri Lanka due to their young and growing populations, necessitating substantial job creation.

South Asian countries would need a sustained commitment to challenging reforms to unlock their export potential. Moody’s expressed skepticism about the realization of export potential in the near to medium term, citing decades of inward-oriented policies that cannot be swiftly overcome.

In addition, the report highlighted the decline in remittances, a significant source of foreign exchange. In the previous fiscal year, remittances plunged by $4 billion compared to the previous year. This downturn was attributed to the economically flawed policy of supporting the interbank rupee rate, hindering market intervention when foreign exchange reserves were critically low. This policy led to the revival of the illegal hundi/hawala system and the suspension of the International Monetary Fund’s Extended Fund Facility program.

The persistently troubling situation was further compounded by the observation that exports primarily consisted of consumer items, ranging from agricultural products like rice and raw cotton to manufacturing output heavily reliant on agricultural inputs, such as textiles, leather, and carpets.

The demand for these products on the international stage experiences significant fluctuations due to global economic conditions, with reduced demand during recessions. Additionally, their pricing is heavily reliant on global supply. Another crucial factor is that Pakistan continues to export surplus output rather than establishing a manufacturing base specifically oriented for exports.

From a historical perspective, it’s noteworthy that Pakistan’s exports to GDP were 13.2 percent in 2013, declined to 12.24 percent in 2014, further decreasing to 10.60 percent in 2015, 9.74 percent in 2016, and 8.22 percent in 2017. Following the departure of finance minister Ishaq Dar, exports to GDP increased to 8.58 percent in 2018, 9.39 percent in 2019, and 10.47 percent in 2022. The recent decline to 10.5 percent in 2023 reflects a persistent trend observed during Dar’s tenure in the finance portfolio.

The report identifies key factors contributing to Pakistan’s challenges in adapting to external shocks: persistent current account deficits driven by low savings and consistently large budget deficits. The recurrent current account deficits necessitate Pakistani administrations to seek IMF programs, with the country currently on its 24th Fund program. Rising budget deficits are attributed to increased revised current expenditure as opposed to development expenditure.

The private sector savings rate in Pakistan is remarkably low due to high inflation. Compounding this issue is the government’s use of funds saved in National Savings Centres entirely for its current expenditure rather than allowing the private sector to enhance productivity.

Moody’s also expresses concern about the limited inflow of foreign direct investment into Pakistan. While the Special Investment Facilitation Council (SIFC) is a positive step, comprising representatives from senior army and civilian personnel, both federal and provincial, synchronizing policy, the government must address the ongoing economic impasse and political uncertainty before attracting foreign direct investment.

There is an urgent need for the government to adopt unconventional policies, implement necessary reforms, and ensure that contracts with foreign entities do not adversely affect Pakistani consumers, as seen in agreements with Independent Power Producers (IPPs). Though challenging, it is hoped that the initiation of policies to meet these objectives will provide a level of comfort to the public.

In conclusion, Pakistan stands at a crossroads demanding immediate and strategic interventions. The decline in exports to GDP, the recurring current account deficits, and the limited inflow of foreign direct investment are pressing issues that necessitate bold policy reforms. The government’s role in fostering a conducive environment for economic growth, addressing political uncertainties, and ensuring fair foreign contracts is paramount. While the challenges are formidable, a proactive and innovative approach is crucial to providing the Pakistani public with a more stable and promising economic future.