Positive Indicators

Pakistan has been plagued by surmounting foreign debt for the past several decades. The country’s economic managers have continuously sought funds from the International Monetary Fund (IMF) and other multilateral donor organizations to stabilize the economy and also provide a much-needed impetus to support pro-growth activities. Unfortunately, Pakistan yet again has to rely on foreign debt and critical funding from various multilateral donor organizations as the policymakers resurrect the economy from a period plagued by low growth and suppressed economic activity. Pakistan has borrowed $12 billion in the 11 months of the previous fiscal year and debt has continued to surmount. This increasing debt serves as a reminder that critical issues plague the economy and it has become increasingly important to address these issues. The policymakers must find ways to accumulate foreign reserves by increasing inflows associated with higher exports, investments, remittances and other productive activities rather than accumulating foreign loans.

Although, the overall external debt has been expanding and consequently increasing the debt-servicing requirement, the Covid-19 pandemic has provided an opportunity to curtail the current account deficit. This account deficit, as reported by the State Bank of Pakistan (SBP) in 2019, was at $8.6 billion. It converted into a surplus of $245 million in 2020, primarily driven by a sharp rise of $3.8 billion in worker remittances in 2020 over 2019 and a $2.2 billion fall in the deficit on trade in services between 2019 and 2020. Another measure to gauge the level of economic stability in the economy is the amount of foreign exchange reserves held by the SBP. In 2018-19, the net reserves with SBP had plummeted to $7.3 billion from $18.1 billion in 2015-16. However, in June 2021, it recovered to $16.1 billion, with $23.297 billion in total liquid foreign exchange reserves in the economy.

This is the highest level since 2017-18, when the economy had plunged into a balance of payment crisis as foreign reserves were drained to alarming levels, given the imports and burgeoning trade deficit. The real effective exchange rate (REER), which suggests the valuation of the rupee in relation to the basket of currencies of the major trading partners relative to the average value in 2010, was PKR. 121. In May 21, it stood at PKR. 102.3. This had plummeted to PKR. 91 in June 2019 as the currency experienced sharp depreciation with the balance of payment crisis raging at the time. The total external debt and liabilities for Pakistan stood at $116.3 billion in March 2021, up from $110 billion in March 2020. However, the external debt and liabilities as a percentage of GDP was declining, from 45.5 percent in June 2020 to 38 percent in March 2021, primarily due to the rise in GDP in current market prices with the appreciation of the rupee from PKR 168.2/USD to PKR 152.6/USD.

However, the recently recorded rising trend in foreign exchange reserves while the exchange rate fluctuates according to market expectations, may indicate a certain resilience in the economy. The economic policymakers must now show prudence in decision-making.

The global ‘normalcy’ index published by the Economist magazine indicates the return to pre-pandemic life. It has ranked Pakistan in the third highest position in the world, following Hong Kong and New Zealand. This speaks volumes for the handling of the pandemic by the Pakistan government, preventing the economy from further tanking into further chaos at a time when it was recovering from the balance of payment crisis. Pakistan ranked the highest in the world in terms of retail footfall and the office-use index, in June 2021, surpassing the pre-pandemic levels reported in March 2020.

The business confidence index published by the State Bank of Pakistan in collaboration with the Institute of Business Administration, Karachi), indicates that the current and expected confidence levels are in the positive zone, suggesting improvement in economic activity. This is consistent with the recovery shown by the Large-Scale Manufacturing (LSM) Index published by the Pakistan Bureau of Statistics. Further, Pakistan’s imports surpassed $6.2 billion in June 2021, which itself indicates strong economic activity. Exports too are rising, with the highest-ever monthly figure reported in June 2021, at $2.7 billion.

Exports in FY21 increased 18.11 percent over FY20, imports increased 26.4 percent and the trade deficit increased by 34.1 percent. Trade deficit increased from $23.2 billion in FY20 and $31 billion in FY21. However, the increase in remittances and the fall in balance of trade in services has had a favourable impact on limiting the outflow of foreign exchange from Pakistan. As mentioned earlier, the foreign exchange reserves have increased.

Although, the indicators have turned positive, the economic policymakers still face the challenge of ensuring that the foreign exchange reserves position remains stable. As the finance minister recently emphasized, policymakers must focus on boosting the nation’s export capabilities. This has to be achieved in a more sustainable way by reducing dependence on subsidies and handouts and not targeting a few selected industries and businesses. Although, there is a surge in exports reported in recent months, it is imperative that the role of SMEs be enhanced through more pro-competitive measures that foster innovation and production of products. For instance, while the uptake of financing to import machinery has been positive, it must be made more inclusive by involving smaller exporters. Such measures will provide greater mileage in ensuring economic stability along with higher growth levels.