FeaturedNationalVOLUME 19 ISSUE # 33

Economic fluctuations

In recent months, Pakistan has witnessed a series of economic fluctuations, marked by varying levels of inflation and foreign investment. While some indicators suggest progress, others highlight ongoing challenges.

This positive development has undoubtedly contributed to the stabilization of the rupee-dollar exchange rate, thereby reducing imported inflation, a component of the Consumer Price Index (CPI), though not affecting core inflation or the Sensitive Price Index (SPI).

Weekly inflation decreased by 0.73% in the week ending June 27, primarily due to a drop in food prices, halting a four-week surge in short-term inflation amid Eid-ul-Azha celebrations. According to data from the Pakistan Bureau of Statistics (PBS), the weekly inflation rate remained elevated on a year-on-year basis, rising by 22.88% compared to the same week last year. Financial experts anticipate that the benchmark monthly inflation rate will rise to 12.9% for June 2024 due to increases in power and food prices around the Eid festival. In May, the rate had hit a two-and-a-half-year low of 11.8%.

Additionally, foreign direct investment (FDI) increased by 15 percent, rising by 224 million dollars to a total of 1.729 billion dollars year-on-year – another positive trend. Although this amount does not place Pakistan among the most attractive countries for foreign investors, the percentage rise is commendable.

Globally, FDI declined by 2 percent to 1.3 trillion dollars last fiscal year, undoubtedly due to ongoing conflicts such as the Russia-Ukraine war and the Israel-Gaza conflict, making it more challenging to attract FDI during these times.

Pakistan, however, is not primarily relying on creating an attractive environment for prospective investors globally, given the fragile state of its economy. Instead, the focus is on a few already identified friendly countries, with proactive diplomatic engagements involving their governments and private sectors.

To date, there have been pledges and only a trickle of FDI inflows. It is crucial to ensure that contracts are thoroughly vetted by specialist lawyers and that the long-term costs to the economy and the general public are assessed before extending any fiscal and/or monetary incentives to foreign investors.

This careful approach is necessary as the country grapples with the high cost of electricity today, stemming from past contracts with Independent Power Producers that included capacity payments and profit repatriation.

Three significant macroeconomic metrics failed to elevate the public’s sentiment. The current account deficit stood at 270 million dollars in May – a deficit following a surplus of 128 million dollars in February, 619 million dollars in March, and 499 million dollars in April, culminating in a February-May surplus of 976 million dollars.

Pakistan’s current account deficit veered into the negative due to a substantial primary income shortfall in May, as reported by brokerage firm Intermarket Securities. The current account recorded a deficit of $270 million in May, marking the first deficit in four months, succeeding a $499 million surplus in April 2024. For the eleven months of the fiscal year 2023-24 (July-May), the current account deficit widened to $464 million, compared to a $3.8 billion deficit in the corresponding period last year.

According to the brokerage note, the principal factor for the negative figure in May was a hefty primary income deficit of $1.4 billion. Absent this, the current account balance would have stayed positive despite a broader goods trade deficit. The primary income deficit surged to its peak level due to $1.5 billion in income payments, likely encompassing interest on foreign debt and a backlog of dividends for multinational corporations.

The State Bank of Pakistan (SBP) indicated that the backlog of dividends has nearly been settled, which should diminish the primary income deficit to approximately $500 million in the ensuing months. In May, the goods trade deficit was $2 billion, exceeding April’s $1.8 billion and doubling the year-on-year figure due to last year’s import restrictions. Imports reached their highest level in fiscal year 2024 to date at $5.0 billion, up 13% month-on-month and 35% year-on-year, driven by seasonally higher petroleum imports (up 8% MoM) and 12% higher machinery imports. Iron and steel imports rose 40% year-on-year, also considered seasonal.

Exports increased by 17% year-on-year, bolstered by textile exports (up 18% YoY) and food exports (up 55% YoY, with rice exports doubling). Remittances in May reached $3.2 billion, up 15% month-on-month and 54% year-on-year, ahead of the Eid-ul-Adha holidays in June. However, remittances are expected to normalize to around $2.5 billion in the coming months.

SBP’s foreign exchange reserves remained steady at approximately $9.1 billion by mid-June 2024, equivalent to around two months’ worth of imports. The SBP reduced interest rates in June by 150 basis points, bringing the policy rate to 20.5%. IMS projected that various industries, including cement, autos, and steel, are operating at low utilization levels (50-60%), potentially leading to a rebound in imports and an expanded trade deficit.

Conversely, stringent budgetary measures for the real estate and textile industries may prolong weak demand, moderating import growth. Nevertheless, a current account deficit exceeding $500 million remains a critical risk, with potential adverse implications for the exchange rate, inflation, and monetary policy, the brokerage firm added.

In summary, while Pakistan’s economic landscape is fraught with challenges, there are also notable signs of progress. Stabilization of the rupee-dollar parity, a decline in imported inflation, and a rise in foreign direct investment are positive indicators. However, the country must navigate these developments carefully, ensuring sustainable growth while mitigating long-term economic risks. The focus on strategic partnerships and meticulous contract vetting will be crucial in shaping Pakistan’s economic future.