NationalVOLUME 15 ISSUE # 16

New threats to Pakistan’s economy

The coronavirus has seriously hit Pakistan’s efforts to improve its economy. Pakistan fears for the worst economic recession, like most countries of the world and region. Despite new challenges, Pakistan can hope for better as it has timely taken harsh measure to improve its fundamentals.

It is a fact that financial indicators of the country had started improving when the pandemic struck Pakistan. The Swiss financial services firm, Credit Suisse, in its latest report noted that Pakistan’s fundamentals have improved significantly but warned of challenges that lie ahead. Titled “Pakistan: On the path to recovery”, the firm credited the assistance from the International Monetary Fund (IMF), fiscal consolidation, and much needed reforms for the improvement in country’s economic condition. “Near term, we expect equities to remain range-bound after a strong rally, but the long-term upside potential remains significant,” the Zurich-based firm said. It also pinned hope on IMF-backed reforms saying that they were injecting a dose of stability into the battered rupee that resiliently recovered four percent following the loan program. “We expect the rupee to remain stable going forward, supported by Pakistan’s commitment to the EFF (extended fund facility) program,” it said in the report.

It said the rupee had become extremely overvalued and the policy to weaken it aggressively erased the overvaluation completely and in fact left the currency looking historically cheap. The appreciation since then has neutralised the rupee’s valuation. It was devalued by around 33 per cent from December 2017 to July 2019, in parallel with the sharp increase in base rates. “Most of the devaluations were undertaken in a series of 5–6 per cent steps and occurred against the backdrop of the government’s negotiations with international donors to bridge its estimated $12 billion financing gap. The rupee has stabilised after a lengthy period of depreciation and foreign investors have started to take notice, with portfolio inflows sharply accelerating over the past six months,” it noted.

The financial services firm further said equities were likely to remain range-bound after a strong rally, but the long-term upside potential remains significant. “The primary risk for investors is the potential for a renewed devaluation. However, with Pakistan still at the early stages of an IMF program, and the build-up in reserves ahead of expectations, we believe this risk is low. Indeed, we see the potential for a further modest revaluation in the rupee.”

However, Moody’s Investor Service lowered its forecast for Pakistan’s growth rate at 2.5pc for the current fiscal year owing to Covid-19 even though it said risks for the entire Asia-Pacific (APAC) region were generally on the downside. It forecast 4.8pc growth rate for China, down from 5pc earlier, on assumptions of slow resumption of economic activity and weak export demand. It said the revised forecasts for the APAC region were based on coronavirus implications, incorporating ongoing travel restrictions and heightened containment measures, as well as the recent oil price shocks.

Rising infection rates would further impede global sentiment, heightening asset price volatility and tightening financing conditions, which could snowball into a deeper economic contraction. A number of governments have already announced measures to cope with the impact of the coronavirus, and Moody’s expects there will be more fiscal stimulus as the extent of the economic fallout becomes clearer. However, some governments — mainly frontier markets — may be constrained by their high indebtedness and limited access to funding. Pakistan is among them owing to more than 80pc of GDP debt burden and weaker fiscal balances, it noted.

At the same time, Moody’s noted significant economic fallout from more rapid and wider spread of the coronavirus as dampening domestic consumption demand in affected countries exacerbates disruptions to supply chains and cross-border trade of goods and services. “The longer the disruptions last, the greater the risk of global recession becomes”, Moody’s said, adding risks were skewed to the downside.

In recent months, international financial institutions have recognised Pakistan’s financial progress. Moody’s Investor Service had upgraded Pakistan’s economy outlook from negative to stable in December. The World Bank also acknowledged Pakistan as one of the top 10 “most improved” countries in the Ease of Doing Business Index. Pakistan’s current account deficit narrowed 75pc to $2.153 billion in the first six months of the current fiscal year of 2020 as imports of goods declined sharply. According to the State Bank of Pakistan, the deficit was around $8.614 billion in the corresponding period of the last fiscal year. The current account deficit, which measures the flow of goods, services and investments into and out of the country, stood at $367 million in December, compared with $364 million in the previous month. Higher foreign investment and increased remittances from Pakistani workers abroad also contributed to the improvement in the current account balance. Trade data, released earlier, showed exports increased by 4.5pc to $12.391b in July-December FY20, while imports fell by 20.9pc to $22.2b in the six months of the current fiscal year.

Foreign direct investment into Pakistan surged by 68.3pc to $1.340b in July-December FY20. Foreign investment in government securities such as market treasury bills and Pakistan Investment Bonds reached $452.2 million in six months of FY20, compared with $0.1 million a year ago. The SBP, in its first quarterly report, expected the current account deficit to be 1.5 – 2.5pc of GDP in FY20, largely due to increasing benefits from import compression. “Most of the improvement in the current account has come from a reduction in the country’s import bill; exports have yet to contribute significantly, as healthy quantum gains are not supported by price trends,” the report said.

In September last year, Pakistan’s current account deficit dropped by 80pc to a 41-month low of $259 million, with a 111.5pc rise in foreign direct investment (FDI) and 194pc increase in private investment. With FDI of $1.34 billion during the first half of the current fiscal year, a 68.3pc increase was registered in January, compared to $796.8 million of the same period of the previous fiscal year. In February, the reserves of the State Bank of Pakistan (SBP) also hit a 21-month high at $11.586 billion. The economic positivity was also reflected by the Karachi Stock Exchange (KSE), which registered a 16-month high in February, crossing the 42,000 point mark after a cumulative increase of 13,000 points in four months.

Inflation is a serious cause of concern for the masses and the government. January saw a 12-year high inflation rate of 14.6. It is expected to increase further in the current situation. If the crisis is handled prudently, Pakistan will emerge as a better country.