With a sinking rupee, fast depleting forex reserves and an unrelenting price spiral, Pakistan’s economy is in dire straits. There are many downside risks associated with the economy, which it has been facing in sustaining growth achieved during the previous fiscal year, according to a recent report by the finance ministry.
The challenges include accelerated inflation, high external deficits, exchange rate depreciation, declining foreign exchange reserves and mounting uncertainty. Although economic growth remained relatively high, it might not be sustainable in the face of macroeconomic imbalances, the finance ministry’s Monthly Economic Update and Outlook for May noted.
The report said that the primary contributors to increasing inflation were a surge in international commodity prices and a massive exchange rate depreciation. In fact, the depreciation of the rupee, both against the US dollar and on a trade-weighted basis, against the currencies of Pakistan’s main trading partners is primarily a reflection of the inflation differential between the country and its partners.
Further, relatively high domestic inflation is compensated by rupee depreciation. However, currency depreciation itself feeds into higher domestic inflation. In this sense, Pakistan is caught in a vicious inflation/currency depreciation spiral.
In the short run, a predicament to stop this cycle is to pursue restrictive fiscal and monetary policies, coupled with policies and announcements that restore market agents’ confidence. In the longer run, Pakistan’s main problems can be solved by designing a credible sustainable future economic trajectory that inspires consumer and investor confidence.
The report noted that economic decisions were based on expectations about the future economic path as well as on the degree of certainty/confidence of development prospects. An important component of such a process is supply-oriented policies.
It was suggested that Pakistan’s propensity to invest was much lower compared to high-growth emerging markets and developing countries. Accelerating the share of Gross Fixed Capital Formation in GDP would create additional production capacity to meet the increasing demand of consumers and producers.
Such a supply-oriented framework designed to reallocate the use of national income from consumption to investment expenditures may be accompanied by suitable demand management policies.
According to the economic update, although the economy had achieved the GDP growth of 5.97pc in the ongoing fiscal year, the fiscal situation and external sector performance were making it difficult to sustain and impacting the growth outlook in the coming year.
As it is, international commodity prices are on a rising trend and expected to increase further in the coming days. The pass-through of the increase in global commodity prices is somewhat contained due to government measures. Even then, it is expected that the Consumer Price Index (CPI) inflation will remain in double digits.
The Monthly Economic Indicator (MEI) remained strong in March due to the unprecedented growth in large-scale manufacturing, the report noted but added that continuing geopolitical tensions, high commodity prices and contractionary monetary policy might slow down economic activity in the coming months.
Exports of goods and services remained strong in April and it is expected that the trend will continue on the back of exports-oriented policies and the growth recovery of main export partners. On a month-on-month basis, growth in imports of goods is expected to be negative due to a ban on non-essential and luxury items. Moreover, remittances are expected to be around $2.5bn. Taking these factors into account, the current account will stay well below $1bn in the coming months. During the first 10 months (July to April) of the current fiscal year, the Federal Board of Revenue (FBR) exceeded its revenue target by 5.2pc, the report noted.
As for the future trends, much will depend on the estimates and projections in the upcoming federal budget. In the given circumstances, it will not be an easy undertaking. Revenues are short of the target, while expenditures are set to rise all round, especially in view of the astronomical rise in petrol and electricity rates. The only silver lining in the dark clouds on the economic horizon is the promised bailout amount from China and Saudi Arabia. As things stand, the PDM government is proving unequal to the gigantic task of economic recovery. A long period of economic uncertainty lies ahead.