At long last the efforts of the Pakistan Threek-i-Insaf (PTI) government to stabilize the economy and put it on the growth path are yielding results. There are unmistakable signs of economic recovery on many fronts. Last year, exports grew around 18% in dollar value while imports rose around 26%.
However, the imports grew at a faster pace than the exports, resulting in a large trade deficit of $31 billion. But, let us remember, this is the normal recovery story in a developing economy where imports exceed exports, giving a fillip to manufacturing and production activities. Both exports and imports went down in FY19 and FY20. In the years, the government pursued a macroeconomic stabilisation path, which slowed the economy down.
The curtailment of imports depends on the pace of macroeconomic adjustment. If the pace of adjustment is fast, imports will be scaled back in a short span of time. This will, in turn, reduce exports since they also depend on imports. The adjustment brought the economy to a level where imports decreased drastically while exports fell slightly.
A heartening development is a rapid rise in remittances. Bourgeoning remittances of $29.4 billion played a major role in bridging the trade gap in FY21. On the other hand, debt servicing requirements were fulfilled through multilateral financing and commercial borrowing fetched through Eurobonds and Sukuk.
The government also made untiring efforts to control the staggering current account deficit. Earlier on, the current account deficit went down a great deal and it gradually helped in bolstering the foreign exchange reserves of the State Bank of Pakistan (SBP), pushing them above $18.2 billion. Lately, the current account deficit has increased a little bit but the overall situation is under control.
The onset of Covid-19 along with an extended lockdown in FY20 provided an opportunity to policymakers to slow down the adjustment process. The accommodating monetary policy along with a tax amnesty scheme given to the construction sector greatly helped to propel the current recovery. The policy rate has been kept at 7% in order to give a boost to the industrial sector. Similarly, the tax amnesty scheme has brought boom to the real estate sector.
As a result, real estate prices have increased a lot in both small and big cities. Along with the elevated real estate prices, there was a mushroom growth in new housing societies last year.
But there is a flip side to the boom in the construction industry. Fears have been expressed that the growing pace of real estate expansion will create environmental and ecological problems in the years to come. Already, unplanned horizontal expansion of cities has destroyed a significant portion of green areas, which has already affected agriculture production. The current expansion will increase the land stock, which will remain unpopulated for a long period of time. On this basis, the current expansion would turn out to be counterproductive in the long run.
Despite these odds, the fact is that the current recovery is propelled by the boom in the construction sector. Construction activity has increased across Pakistan as consumption of cement has gone up around 18%. Similarly, steel consumption has also increased. The high demand for steel and cement has boosted these sectors and generated employment opportunities for a large number of people. In addition, glass, ceramics, paints and other construction-related industries have got a boost.
On the other hand, the higher real estate prices have significantly impacted the sales of automobiles. Most people use their capital gains to buy high-end cars. According to experts, the higher real estate prices have become a contributing factor in the surge in car sales.
The government intends to sustain the recovery through a lax fiscal policy where expenditures will increase along with a nominal increase in taxes. This policy will increase imports, which crossed $6 billion in June 2021. The higher imports will increase the current account deficit and put pressure on the foreign exchange reserves.
Under the emerging situation, imports will surpass exports by a huge margin and the balance of payments will come under strain in due course. If the government does not use the reserves, the pressure will fall on the rupee in the form of further depreciation.
All told, the economy has entered the recovery phase. But the boons of the recovery are still limited to a certain segment of the population. The government must adopt policies to ensure that all sections of the population equally benefit from the economic growth.