NationalVOLUME 16 ISSUE # 21

Pakistan on the path to prosperity

Pakistan is growing steadily despite facing the pandemic and other challenges. It is a great achievement of the government of Prime Minister Imran Khan that Pakistan has contained economic and human losses at a time when the region faced the worst crisis.

International financial institutions have also recognised Pakistan’s economic recovery after it faced the worst recession of its history last year. Fitch Ratings has affirmed Pakistan’s long-term foreign-currency issuer default rating (IDR) at ‘B-‘ with a Stable Outlook. In its report, it said Pakistan’s ‘B-‘ rating reflected weak public finances, external finance vulnerabilities, and low governance indicator scores. The authorities have made progress in addressing external and public finance challenges over the past few years, despite the headwinds from the Covid-19 pandemic. However, economic uncertainties from the pandemic and political challenges to keeping the reform agenda on track pose risks. A decline in external vulnerabilities has been facilitated by adherence to a market-determined exchange-rate regime, which has served as a shock absorber during the pandemic. Progress towards institutionalising this framework, if sustained, should limit medium-term risks by keeping current account deficits contained and reducing foreign-exchange (FX) reserve pressures.

The report said external inflows have supported an appreciation of the Pakistan rupee against the US dollar and a further rebuilding of FX reserves. Fitch forecasts that official FX reserves (excluding gold) will reach $17.4 billion (3.2 months of current external payments) by the end of the fiscal year to June 2021 (FY21) from $13.3 billion at FYE20. “Under our baseline, reserves are expected to rise to $22.3 billion by FYE22, including a planned $2.8 billion boost from the IMF’s special drawing rights allocation,” it noted.

It projected Pakistan’s current account deficit to narrow to 0.5pc of GDP in FY21, from 1.7pc in FY20, due to a surge in remittance inflows, import compression, and low average oil prices. Remittance growth averaged nearly 30pc yoy in FY21, reflecting a shift from informal to formal remittance channels and an underlying increase in transfers from non-resident Pakistanis. Export growth, which is the key to medium-term external sustainability, has also picked up, but from low levels. It forecast a widening of the current account deficit to 1.9pc of GDP in FY22 as the recovery in domestic demand and higher oil prices push imports higher.

External debt repayments will remain high, at about $8-10 billion per annum over the next few years. Participation in the G-20’s Debt Service Suspension Initiative (DSSI) has reduced near-term pressures by postponing $3.7 billion in payments previously scheduled between May 2020 and December 2021 to over a five- to six-year period. The international rating agency says public finances remain a key weakness for the sovereign. “We project the general government fiscal deficit will narrow slightly to 7.5pc of GDP in FY21, from 8.1pc in FY20, as revenue growth has been resilient due to tax administration improvements and the growth rebound. We forecast a further narrowing to 6.6pc of GDP on improving revenue and declining expenditure. We project Pakistan’s debt-to-GDP ratio to decline to 83.7pc in FY21, from 87.2pc in FY20, as a result of rupee appreciation against the US dollar and high nominal GDP growth,” it noted.

The rating agency also backed the government’s 3.9pc GDP growth in FY21. “Pakistan’s economy appears so far to have weathered the pandemic shock well relative to peers. Provisional data indicated GDP growth of 3.9pc in FY21, from a contraction of 0.5pc in FY20. We forecast GDP growth will stabilise at 4pc in FY22, supported by a continued strengthening of domestic consumption and resilient manufacturing and construction activity.”

The agency notes that inflationary pressures have re-emerged with the CPI reaching 11.1pc yoy in April, but expects inflation to moderate to an average of 8.3pc over FY22, from an average of 9pc in FY21, as the temporary rise in food prices subsides, and the rise in oil prices moderates.

JP Morgan, a leading financial services company, has also put its weight behind Pakistan’s economy. In its report, it said there have been positive developments in recent months including the $6-billion International Monetary Fund (IMF) package, a narrowing current account deficit, recovery in the rupee, in addition to GDP growth in the outgoing fiscal year. However, challenges remain for Pakistan including risks surrounding “current account deterioration; elevated risks of frequent Covid-19 waves, largely negative real yields; and political pressure to stimulate growth, which would presumably require a reappraisal of IMF program targets”. “Preliminary estimates for FY21 growth point to a sharp rebound from the Covid-19 shock; and the fiscal deficit should continue to shrink in GDP terms. We also expected the economy to continue to grow by around 4pc in the next fiscal year.”

Forbes, a leading American business magazine, has also lauded the government’s efforts to tackle pandemic and stabilise Pakistan’s economy, saying that the government has been successful in reviving its economy through prudent policies which is expected to grow at 4pc. “Successful management to tackle the pandemic and the success of the IMF programme, as evidenced by the 4pc GDP growth, is a testament to Pakistan’s growth potential and good investment opportunities,” the magazine noted. It said when countries, like the United States and India have had difficulties in dealing with the pandemic, Pakistan has succeeded in reviving its economy.

India’s economy contracted 7.3pc in 2020-21, its worst recession since independence as coronavirus lockdowns put millions out of work. Official data shows its economy grew by 1.6pc between January and March — the fourth fiscal quarter — after exiting its first “technical recession” since 1947 following two successive quarters of contraction. About 230 million Indians fell into poverty due to the pandemic last year, according to a study by Bangalore’s Azim Premji University, which defined the poor as those living on less than 375 Indian rupees ($5) a day. India’s vicious second wave, which has killed 160,000 people in eight weeks, prompted further lockdowns and saw 7.3m people lose their jobs in April alone, according to the Centre for Monitoring the Indian Economy.

Undoubtedly, Pakistan’s smart lockdown policy has worked and it has escaped with minimum human and economic losses, as compared to its archrival. However, the biggest challenge for the PTI government will be high inflation. According to the State Bank of Pakistan, overall national CPI inflation fell to 8.6pc during H1-FY21, from 11.1pc in the same period last year. In its latest report, it warns the prices of food items remain vulnerable to supply-side pressures. It is obvious that the economic recovery will be meaningless without providing relief to the common people from high prices.