Pakistan faces a number of formidable economic challenges, including runaway inflation, a growing trade deficit, depreciating currency, slow growth, a high rate of unemployment, a crippling circular debt and high import bill. Pakistan’s economic growth was negative 0.5% in 2020, while the International Monetary Fund (IMF) projected the growth rate of 1.5% for 2021, even though the State Bank of Pakistan (SBP) had put forth its rate of growth at 3%.

However, the situation turned around a little and due to rising global demand for goods and a weak rupee, Pakistan exports began to inch up. Pakistan’s exports were $1.26 billion for May 2020, but the exports’ value in June 2021 was more than double of that at $2.5b. Exports did well throughout the year. The exchange rate, which was PKR160.5 on January 1, 2021, was whittled down to PKR152.1 on May 14.

Pakistan’s booming exports and improved agricultural output greatly improved the overall economic prospects. As a result, the International Monetary Fund (IMF) revised its earlier prediction and projected GDP growth to 3.9%. The 3.9% growth was less than the 6% growth projected in 2021 for the global economy as a whole but it was a massive improvement from 1.5% stated earlier. The SBP projected its forecast of GDP growth to rise from 3.9% in FY21 to 4-5%, and average inflation to decline to 7-9%, from its recent higher metrics.

But rising exports were not without their side effects. As exports increased, so did Pakistan’s imports. This is because industries in Pakistan have not been able to manage import substitution in 70 years despite generous government incentives and facilities. As demand for steel, oil, and other industrial raw materials went up, so did the import bill and with it came increasing pressure on the local currency. Commodity prices also started going up, including that of imported food items. Oil prices have been increasing due to rising demand, forcing Pakistan to import expensive oil and related energy products.

All these factors combined together have put the Pakistan rupee under severe strain. Since May 13 2021, the rupee has continuously shed its value making imports even more expensive. Currently, it is PKR178.5 to the US dollar. Pakistan’s exports have done relatively better recently. During November 2021, they increased by 33 percent to a historic monthly high of $2.903 billion as compared to $2.174 billion during the corresponding period last year. Abdul Razak Dawood, adviser to the Prime Minister on Commerce, recently said that the cumulative exports in the first five months from July to November 2021 were $12.365 billion, a big increase from the $9.747 billion recorded in the same period of the last fiscal year, which showed a growth of 27%.

However, the export gain was overshadowed by a big spike in the import bill. In November, the trade deficit grew by 162.4%, largely due to imports being three times compared to exports. The trend started in June and the deficit has been growing since then, with the actual deficit in November going up to $5.107b compared to $1.946b in the same month last year. The import bill itself reached an all-time high of $8.01b from $4.12b over the corresponding month of 2020, a whopping increase of 94.41%.

Although remittances have also been growing at a high rate, the demand for dollars for imports has far outstripped supply, leading to a worsening trade deficit. Macroeconomic figures are concerning, with inflation at nearly 11%. The Consumer Price Index (CPI) shows a constant increase from 5% in January 2021, to 11.5% in November 2021.

The Wholesale Price Index (WPI), which monitors prices in the wholesale markets across Pakistan, saw a massive increase of 27% in November 2021, while the Sensitive Price Index (SPI), which monitors the prices of 51 essential commodities, also shows an average increase of 19.43% on an annual basis. Food, fuel, transport, medicines, consumer goods, and other basic necessities are fast becoming unaffordable for the common man. To contain inflation, the SBP raised interest rates recently but with little impact on the situation.

What is the way out of the situation? The challenges are daunting calling for coordinated action on many fronts. According to experts, unless something is done on the policy side, 2022 will be a more difficult year than 2021. We must go for indigenisation to reduce our dependence on imports – both raw materials and finished goods. A promising areas is agriculture exports which call for serious attention at the government level. Another ray of hope is the growth of technology and startup companies which attracted over $300 million in foreign direct investment (FDI). Foreign investment is the key to rapid economic growth which can be attracted in a big way through a carefully worked-out package of incentives.