NationalVOLUME 14 ISSUE # 24

Silver linings?

Pakistan’s economic growth is feared to further decelerate in the current fiscal year from a nine-year low of 3.3pc in the last year due to internal and external factors. Inflation is also expected to rise and impact the real economic growth. However, there are still some silver linings in dark clouds hovering over Pakistan’s economy.


According to the State Bank of Pakistan (SBP)’s third quarterly report on the state of Pakistan’s economy for fiscal year 2018-19, measures to cut aggregate demand in the overheated economy in the face of hikes in key interest rate would impact economic growth. A likely further increase in power tariffs and recent surge in gas prices would take inflation to a higher side and impact the real economic growth on the local front. Besides, the measures to narrow down fiscal and current account deficits, like rupee depreciation, global economic slowdown due to the escalated US-China trade war and likely increase in international oil prices, would also impact economic growth, the central bank warned.


However, some of the economic indicators may bounce back to show some stability, the SBP noted. “With stabilisation policies in place and the economy moving along the reforms agenda, the country’s macroeconomic indicators are expected to slowly revert to a stable trajectory. In this process, however, the real GDP growth is likely to remain contained,” the SBP said in the report. The central bank, however, did not project the economic growth for the year, though it usually did in the past. It reported nine-year low GDP growth of 3.3pc for FY19, which was lower than the downward revised projection of 3.5-4pc made in March 2019. The Planning Commission has set the economic growth target at 4pc for the current fiscal year 2019-20 while the Finance Division thought it would be 2.4pc expansion in the year.


In a significant move, the State Bank of Pakistan has laid the foundation to eliminate exchange companies from the currency business by allowing banks and their all branches to buy and sell foreign currencies with the public across the country. Earlier, the banks were not allowed to sell or buy foreign currencies directly from the public except for those having their own exchange companies. Under the headline of purchase of foreign currency notes from the public, the SBP said that all incoming persons — whether Pakistani or foreign national — can bring with them without any limit foreign currencies and other instruments against the submission of a declaration to the customs authorities on amount exceeding $10,000 or equivalent. Experts believe the step will eliminate exchange companies from the business, discourage hoarders of the foreign currency and result in a stable value of the rupee against the dollar.


In another encouraging development, Pakistan received $21.84 billion in remittances sent home by overseas Pakistanis in the last fiscal year. The inflows were 3pc, or around $640 million, higher than the set target of $21.2 billion for the year. The inflows were around 10pc higher than $19.91 billion received in the previous fiscal year 2017-18, according to the State Bank of Pakistan (SBP). The country achieved higher remittances due to improved economic activities and higher job opportunities available in the Western countries, like the US and the UK. Moreover, the end of financial crisis in oil producing and exporting Gulf and Middle Eastern countries including Saudi Arabia and the UAE due to a notable recovery in oil prices also contributed to the increase as majority of Pakistanis live in the region. A massive 32pc depreciation in the local currency to Rs160.05 to the US dollar led overseas Pakistanis to send higher remittances during the year. Moreover, a crackdown on illegal remittance operators – hundi and hawala operators – also prompted Pakistanis to send remittances through proper legal channels, including banks.


In another significant development, the Pakistan Tehreek-e-Insaf (PTI) government has managed to narrow down the trade deficit by 15.3pc to $31.8 billion on the back of import compression but it failed to enhance exports, which fell even below the level left behind by its archrival – the Pakistan Muslim League-Nawaz (PML-N). Trade figures released by the Pakistan Bureau of Statistics (PBS) show that exports contracted both on month-on-month and year-on-year basis in June 2019, despite over one-third depreciation of the rupee against the US dollar. The PTI government missed its export target by $4 billion as total exports stood below $23 billion at the end of fiscal year 2018-19. It also missed the trade deficit reduction target by $5.8 billion, although the gap between exports and imports shrank 15.3by. Overall, the trade deficit, which stood at $37.6 billion in the preceding fiscal year, shrank to $31.8 billion in fiscal year 2018-19, the PBS reported. In absolute terms, there was a reduction of $5.8 billion in the trade deficit and the entire reduction came from the import side. Overall imports dropped 9.9pc to $54.8 billion in FY19 but the improvement was mainly because of reduction in machinery imports. In absolute terms, the imports contracted by $6 billion, which provided some relief to the government.


Some positive signs were also noted by the SBP, which said some support to the GDP growth can possibly come from strong prospects in the agriculture sector, where there is potential for higher output if the impact of constraints affecting area under cultivation and yields is managed effectively. Early investments in agriculture and Special Economic Zones (SEZs) under the China-Pakistan Economic Corridor (CPEC) and higher outlay of next year’s Public Sector Development Programme (PSDP) can also have a positive impact on GDP growth in FY20.

The economy has started producing some encouraging signs. The rupee has stabilized to a large extent. Traders have reopened their businesses after a countrywide strike. Prices of daily-use items are still high but so are hopes of people from the government, which has announced a number of programmes to offset the impact of its harsh measures to improve the economy.