FeaturedNationalVOLUME 16 ISSUE # 02

In search of succor

Pakistan’s improving fiscal indicators are encouraging after the country successfully tackled the coronavirus pandemic, with minimum human life and economic losses as compared to regional and Western countries. However, the question remains: Whether the economic turnaround will sustain and its fruit will reach the common people, who have suffered unprecedented job losses, inflation and poverty in recent times?

No doubt, short-term trends indicate the economy is on the path to growth. Exports are growing, the trade balance is narrowing with the passage of every month. Workers’ remittances are increasing. Over 23pc more taxes have been collected in the first month of the new fiscal against a target of Rs243b. The stock market has bounced back. Real estate prices are also rising after concessions announced for construction and housing. Pakistan’s economy could expand by around 1pc in the first quarter (Q1) of the current fiscal year but remittances would go down to their monthly average of around $2.2 billion, according to the finance ministry. However, it said the Federal Board of Revenue (FBR) had exaggerated tax collection by Rs10 billion for July. In its monthly Economic Updates and Outlook report for August, the ministry said inflation would remain at its current level and there was less money available for private sector borrowings during the first five weeks of the current fiscal year. In its previous outlook for July, the ministry said the economy had grown by 0.97pc in the first (July-September) quarter of the last fiscal year. In the last fiscal year, the economy contracted 0.4pc, largely because of the spread of the coronavirus pandemic. The ministry predicted that inflation would remain in the range of 8.4pc to 9.7pc in August. It was 9.3pc in July.

Pakistan’s exports rose by 20pc in July after a four-month decline following the coronavirus restrictions and lockdown in the country. The exports for July grew by 5.8pc in dollar value terms, as compared to the same month last year. The current account swung back to surplus for the third time since October 2019. According to the State Bank of Pakistan, the country recorded a surplus of $424 million in July, a turnaround from a deficit of $100 million the preceding month. Pakistanis abroad sent home remittances worth $2.77 billion in July, which was the highest amount of dollars Pakistanis overseas have ever sent back to their families. Experts have attributed the increase in remittances to seasonal inflows ahead of Eid and layoffs of Pakistani workers in the Gulf countries, who brought with them their savings. Another factor that helped improve the current account situation was exports. Exports went up 19.7pc in July, after a 25.5pc growth in June. In recent months, international oil prices have started recovering from recent lows and the dollar-rupee exchange rate is also rising gradually. The rupee further shed its value and traded at Rs168.43 against the greenback in the interbank market.

Pakistan has seen an 88pc increase in foreign direct investment (FDI), from $1.36b in 2019 to $2.56b in 2020, according to the data released by the State Bank. FDI improved from 2015 to 2018 and then fell in 2019, because of the rupee depreciation but it is improving again in 2020 even though the economy was hit hard by the coronavirus pandemic. The foreign investment improved because China is investing in the telecommunication and power sector via the CPEC programme. With Pakistan’s new government gaining the trust of its Chinese counterparts, it is expected that investment from China will keep coming in. The government expects a strong economic rebound during the current quarter on the basis of prospects of the international environment and the prevailing economic, fiscal, monetary and exchange rate policies at home.

International financial institutions have also projected Pakistan’s economy to remain stable. In its latest report, Fitch Ratings has affirmed Pakistan’s long-term foreign credit rating at ‘B-’ with a stable outlook, anticipating a surge in foreign exchange reserves to a four-year high at $16 billion by June 2021 under the ongoing International Monetary Fund (IMF) loan programme and available Saudi Arabia’s financing. It expects Riyadh would withdraw the remaining deposit of $2 billion from the State Bank of Pakistan’s (SBP) foreign exchange reserves on the scheduled timeline of 2022. Besides, the country has plans in place to float Eurobond and Sukuk to borrow more from the international market by December 2020. It expected economic revival in FY21, expecting gross domestic product (GDP) growth of 1.2pc compared to a contraction of 0.38pc in FY20. It also found Pakistan’s policy actions on the economic front like a tight monetary policy and a flexible rupee-dollar exchange rate regime very much sound.

The Covid-19 outbreak, however, prompted authorities to significantly cut the benchmark interest rate by 625 basis points to 7pc to help households and businesses to cope with the pandemic. With this, the real interest rate has fallen to negative. Moreover, the net foreign exchange reserves dropped to negative and the rupee depreciated further mainly due to panic pullout of investment by foreigners from rupee-denominated treasury bills and Pakistan Investment Bonds (PIBs) to the tune of $3 billion since the Covid-19 emergence. The current challenges to the economy like weak public finances, large fiscal deficits, high government debt-to-GDP ratio and large external debt repayments against low foreign exchange reserves led Fitch to rate Pakistan’s long-term foreign currency issuer default rating (IDR) at ‘B-’. “The coronavirus pandemic has exacerbated these challenges by depressing economic growth and pressuring public finances,” it said. Pakistan may face challenges in collection of revenue in taxes and workers’ remittance may drop due to Covid-19 challenges. It, however, finds it difficult for authorities to announce a second stimulus package for individuals and businesses to cope with Covid-19 challenges. The situation may increase the debt-to-GDP ratio to 90pc in FY21 and expected to reduce to 85pc by FY25. The agency, however, strongly expected the country’s economic indicators to improve growing forward, as Pakistan is committed to implement the economic reform agenda under IMF loan programme.

Besides the short-term challenges, the government has failed to stabilize prices, which fluctuate on a daily basis instead of months and years. It has already eroded the credibility of the government in the public. The prices have more than doubled in the first two years of the PTI government. About 12.3 million to 18.5 million people have lost their jobs in Pakistan, according to the government’s own estimates. The national poverty rate, which was 31.3pc in June 2018, could jump to over 40pc this year and it is feared four out of every 10 Pakistanis will be poor in coming months. People cannot be impressed with statistics and rhetoric, they need jobs and relief from high prices urgently.