FeaturedNationalVOLUME 17 ISSUE # 29

From stability to negativity

Pakistan’s economy grew at a rate of 5-6 percent in the last two years. The country has not seen such a high growth rate for two consecutive years and it was hoped that it could break its boom and bust cycle. However, political instability has changed everything.

It is a fact that Pakistan has faced booms and busts every three to four years and failed to achieve its true potential. Its current account deficit starts widening when its economic growth accelerates. However, there was a strong possibility that the country would break the cycle and attain sustained growth as a result of economic reforms. However, the political chaos has derailed the process again.

As a result, Moody’s Investors Service – one of the world’s top three credit rating agencies –downgraded Pakistan’s outlook from stable to negative. However, it affirmed the ‘B3’ local and foreign currency long-term issuer and senior unsecured debt ratings. In its latest report, it said, “The decision to change the outlook to negative is driven by Pakistan’s heightened external vulnerability risk and uncertainty around the sovereign’s ability to secure additional external financing to meet its needs.”

The rating agency assessed that Pakistan’s external vulnerability risk had been amplified by rising inflation, “which puts downward pressure on the current account, the currency and – already thin – foreign exchange reserves, especially in the context of heightened political and social risk”. It noted that Pakistan’s weak institutions and governance strength add uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF Extended Fund Facility (EFF) programme and maintain a credible policy path that supports further financing. “The decision to affirm the B3 rating reflects our assumption that, notwithstanding the downside risks mentioned above, Pakistan will conclude the seventh review under the IMF EFF programme by the second half of this calendar year, and will maintain its engagement with the IMF, leading to additional financing from other bilateral and multilateral partners,” it said.

However, Moody’s assessed that Pakistan would be able to close its financing gap for the next couple of years. The B3 rating also incorporates the agency’s assessment of the scale of Pakistan’s economy and robust growth potential, which will provide the economy with some capacity to absorb shocks. These credit strengths are balanced against Pakistan’s fragile external payments position, weak governance and very weak fiscal strength, including very weak debt affordability. The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness, which point to material transfer and convertibility risks notwithstanding moderate external debt, the report said.

The past government was working on a three-year economic growth strategy, which focused on trade with China and other sectors to achieve an average growth rate of 5.9pc and per capita income of over $2,100 by 2025. The plan sought to achieve sustainable growth by focusing on economic relations with China and the sectors with a competitive advantage.

As a result, Pakistan’s economic growth rate accelerated to 6pc during the last year of Imran Khan’s government, which was the highest rate in four years. The size of the economy swelled to $383 billion and per-capita income also increased. According to the Planning Ministry, the provisional Gross Domestic Product (GDP) growth rate for the year 2021-22 is estimated at 5.97pc. The broad-based growth was witnessed in all sectors of the economy in the outgoing fiscal year. The nearly 6pc growth rate is higher than the official target of 4.8pc and far higher than the estimates of the Ministry of Finance, State Bank of Pakistan, International Monetary Fund, World Bank and Asian Development Bank.

According to the Planning Ministry, the agriculture sector grew by 4.4pc, nearly 1pc better than the previous year. On the back of the Large Scale Manufacturing sector, the industrial sector grew at the rate of 7.2pc, lower than the previous fiscal year. The growth in the services sector was slightly better than the previous fiscal year, standing at 6.2pc. The better crop production also supported the higher growth, except for wheat whose output decreased by one million metric ton to 26.4 million metric ton. The size of the economy reached nearly Rs67 trillion in 2021-22 – about Rs3 trillion higher than the estimates. In dollars terms, the volume of the economy in 2021-22 stands at $383 billion. The per capita income that had been estimated at $1,676 in the last fiscal year increased to $1,798 –a surge of $122 or 7pc per person. In rupee terms, the income jumped from Rs268,223 in 2020-21 to Rs314,353 in 2021-22.

According to the latest State Bank of Pakistan (SBP) report, “External pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors. Domestically, an expansionary fiscal stance this year, exacerbated by the recent energy subsidy package, has fueled demand and lingering policy uncertainty and compounded pressures on the exchange rate. Globally, inflation has intensified due to the Russia-Ukraine conflict and renewed supply disruptions caused by the new COVID wave in China. As a result, almost all central banks across the world are suddenly confronting multi-year high inflation and a challenging outlook.”

Inflation in Pakistan has reached over 20pc after massive hikes in fuel, electricity and gas prices. The rupee has also devalued sharply in recent weeks. Inflation is feared to worsen. The present government is also facing problems because the last government had frozen fuel and electricity prices after seeing its ouster through a no-confidence motion. It should not have done it if it would have been certain about completing its term. Pakistan will have to ensure political stability to avoid economic uncertainty in future.