NationalVOLUME 16 ISSUE # 02

Early signs of amelioration

Early signs of economic recovery are visible in Pakistan but some experts are still skeptical about their sustainability. Pakistan’s challenges have compounded during the outbreak of the novel coronavirus and it needs urgent reforms to resolve public issues as the government can no longer blame the pandemic for the turbulent economy.

Pakistan faced negative average growth of 0.4pc for the fiscal year 2019-20, for the first time in 68 years, with large-scale manufacturing decelerating by over 10pc. Though no data is available, yet Pakistan must have the largest number of unemployed people in its history. The Asian Development Bank (ADB) fears the pandemic may leave around 2.3 million youths without jobs in Pakistan. It predicts the youth unemployment rate may double from 2019. According to a recent government report, inflation, the second biggest issue of the people, is expected to remain almost unchanged during the current fiscal year.

Fortunately, the economy has shown early signs of recovery. Pakistan’s current account became surplus for the third time since October 2019, the State Bank of Pakistan said. After a rough patch in the outgoing fiscal year, exports have not only recuperated but also grown by 5.8pc year-on-year (YoY) in dollar terms in July. It is the first time Pakistan has experienced export growth since March. On the contrary, India saw a YoY contraction in exports in July by over 10pc while Bangladesh’s exports improved by a mere 0.59pc. The Pakistan Stock Exchange saw a gain of 14.05pc in its benchmark KSE-100 index in July. The monthly improvement was the highest in the last four years, with the month being the best in seventeen years for the KSE-100 index in terms of return.

Moreover, July saw a 40pc YoY growth in cement sales, reflecting the success of an unprecedented construction package. The Federal Board of Revenue (FBR) also exceeded the tax collection target by Rs 57 billion. The monthly collection was 6pc (Rs 17 billion) higher than in the same period last year. Pakistan also witnessed an increment in foreign remittances from $2027.9 million to $2768.1 million on a YoY basis. The 36.5pc growth in remittances is the highest ever observed in a single month in Pakistan. The foreign direct investment (FDI) in various sectors also surged by 60pc YoY to $114.3 million in July against $71.1 million last year. However, it was 35pc lower as compared to $174.8 million FDI received in June. The average FDI before the onset of the pandemic was $250-300 million.

Pakistan also saw a week-over-week (WoW) decline in the Sensitive Price Index (SPI) for the first two weeks of August by 0.06pc and 0.22pc, respectively. The Supreme Court’s decision on gas infrastructure development cess (GIDC) in favour of the government will save Rs 400 billion and successful renegotiations with the Independent Power Producers (IPPs) would save Rs 605 billion.

Top international rating agencies have also recognised Pakistan’s economic achievements. Fitch Ratings has affirmed Pakistan’s long-term foreign credit rating at ‘B-’ with a stable outlook, anticipating a surge in foreign exchange reserves to a four-year high at $16 billion by June 2021 under the ongoing International Monetary Fund’s (IMF) loan programme and available Saudi Arabia’s financing. It expected economic revival in FY21, with gross domestic product (GDP) growth of 1.2pc compared to a contraction of 0.38pc in FY20. It also found Pakistan’s policy actions on the economic front like a tight monetary policy and a flexible rupee-dollar exchange rate regime very much sound. The current challenges to the economy, like weak public finances, large fiscal deficits, high government debt-to-GDP ratio and large external debt repayments against low foreign exchange reserves, led Fitch to rate Pakistan’s long-term foreign currency issuer default rating (IDR) at ‘B-’. “The coronavirus pandemic has exacerbated the challenges by depressing economic growth and pressuring public finances,” it said. Pakistan may face challenges in collection of revenue in taxes and workers’ remittance may drop due to Covid-19 challenges. The situation may increase the debt-to-GDP ratio to 90pc in FY21, which will reduce to 85pc by FY25, it estimated.

The Standard & Poor’s (S&P) rating agency also affirmed Pakistan’s ‘B-’ long-term and ‘B’ short-term sovereign rating while maintaining a ‘stable’ long-term outlook. The New York-based rating agency also affirmed ‘B-’ long-term issue rating on Pakistan’s senior unsecured debt and sukuk trust certificates. It said the country’s rating remains constrained by a narrow tax base and domestic and external security risks, which continue to be high. Although the country’s security situation has gradually improved over the recent years, yet ongoing vulnerabilities weaken the government’s effectiveness and weigh on the business climate. It said the Covid-19 pandemic exacerbated Pakistan’s economic downturn but forecast the real GDP to recover to 1.3pc during the current fiscal year. “We expect the sovereign’s credit metrics to remain under pressure for the next two to three years”, said the S&P.

The agency, nevertheless, noted that the government had made solid progress toward important fiscal and economic reforms before the start of the global coronavirus outbreak, and reform momentum should return once the pandemic was better contained. Multilateral and official funding will remain critical to Pakistan’s external debt sustainability. It said the stable outlook reflected rating agency’s expectations that funding from the International Monetary Fund (IMF) and other partners, along with a recent improvement in Pakistan’s balance of payments position will be sufficient for the country to meet its considerable external obligations over the next 12 months. The rating agency said it may lower its “ratings if Pakistan’s fiscal, economic, or external indicators deteriorate further, such that the government’s external debt repayments come under pressure”. Indications of this would include external or fiscal imbalances higher than expected. Pakistan’s economy is likely to recover only gradually as the global pandemic is progressively better contained. Following Pakistan’s worst economic performance on record in FY20, the agency forecast a modest expansion of 1.3pc in FY21.

Many people may find new jobs after the country opens up and economic activity is gaining momentum. The government will have to encourage the private sector to create job opportunities. It will also have to take practical measures to cut prices of essentials, otherwise, an economic turnaround will be meaningless for the people.