A precarious journey to economic uncertainty

In numerous instances, a pervasive sentiment has permeated the media landscape, suggesting that Pakistan could potentially face the prospect of defaulting on its debt commitments, ultimately leading to a potential collapse of its economy. Moreover, an additional assertion has been made which states that the combination of a sluggish GDP growth and a hike in inflation serves as a revealing indication that Pakistan's likelihood of defaulting is a matter worthy of consideration. Amidst the tumultuous events witnessed at the beginning of the preceding Fiscal Year, concerns emerged regarding repayment of Pakistan’s foreign debt and a potential default thereof. However, Pakistan has successfully met all of its debt repayment obligations. As per data provided by the State Bank of Pakistan (SBP) on predetermined short-term drains on foreign currency reserves, Pakistan has repaid approximately $20.84 billion between April 2022 and April 2023 worth of foreign repayments. Simultaneously, Pakistan has also ensured the settlement of essential import bills as well. Considering all the chaos, political instability, and the havoc that the floods have caused, this is an impressive feat. Furthermore, it is also noteworthy that the Pakistani economy has, in March 2023, achieved a Current Account surplus sabbatical of 28 months. Unfortunately, this achievement has received limited attention. Facing the aftermath of a natural calamity, a severe balance of payments crisis in FY22, and unprecedented political unrest, Pakistan has been engaged in negotiations with the International Monetary Fund (IMF) to unlock a tranche worth $1.1 billion from the agreed $6.5 billion bailout package that was signed back in 2019. The graph herein below illustrates the trend for major indicators for the past 8 years.

The National Accounts Committee has recently revealed that the provisional estimate of the GDP growth rate is 0.29 percent compared to the revised estimate of 6.1 percent from the previous year. It is worth noting that last year's growth was primarily driven by consumption and import-oriented activities rather than inclusive growth as seen in the aforesaid chart. In similar vein, as the economy overheated in the previous year due to an import and consumption led growth, Pakistan suffered a CAD of $17.4 billion. It is due to this severely inflated CAD, the Government had to limit imports in order to curb their external financing requirements for the outgoing Fiscal Year. Fortunately enough, the Government has been able to control the CAD in a positive manner considering the extreme balance of payment crisis our Country is going through. The CAD has been reported at is $3.258 billion in Jul-April period for FY2022-23. Moreover, an analyses of certain major indicators are self-explanatory, in so much so, that both the Industrial and Agriculture sectors have experienced a decrease in their respective shares since the FY2017-18, further exacerbating the situation.

The aforesaid table showcases that although Pakistan has achieved GDP growth above 5 percent twice in the past 5 fiscal years, the share of prominent sectors in our GDP have been relatively stagnant, if not on the verge of decline.

Furthermore, in the outgoing fiscal year, the floods destroyed huge masses of cultivated area and livestock in the country, creating a massive food supply disruption and therefore rendering Pakistan in a state of food insecurity. This is reflected in the provisional estimation of the main cash crops of Pakistan’s economy, primarily attributed to a decline in the production of Cotton by 41 percent (from 8.33 to 4.91 million bales) and Rice by 21.5 percent (from 9.32 to 7.32 million tons).

However, positive growth has been observed in wheat, with an increase of 5.4 percent (from 26.21 to 27.63 million tons), sugarcane by 2.8 percent (from 88.65 to 91.11 million tons), and maize by 6.9 percent (from 9.52 to 10.183 million tons). In addition to that, Pakistan's export sector heavily relies on the textile industry, accounting for almost 59 percent of its total exports in the Jul-April period of FY23. However, the country is currently facing a shortage of cotton, which is expected to impact its export capabilities compared to the previous year. While importing cotton is an option for the government that comes with its own opportunity cost. It is imperative to note that Pakistan cannot afford to sustain another year of a substantial trade deficit, as it would ultimately lead to a higher CAD.

Interestingly, it is notable that exports have experienced a relatively modest decline of 12.14 percent considering the ongoing global recession. In contrast, import bills have witnessed a more substantial decrease of 29.22 percent, which is more than twice the rate of the decline in exports. This significant reduction in imports has resulted in a prominent contraction of above 40 percent in the trade deficit for the current fiscal year compared to the previous year.

During this challenging period, Pakistan witnessed a remarkable surge in its inflation rate, reaching a record level. The average inflation rate for the period of July to May in the outgoing fiscal year, FY23, stood at 29 percent. In this context, reviving the relationship with the IMF becomes a top priority for Pakistan. However, the progress in this regard was hindered by subsidies given in the previous fiscal year that led to delays. These subsidies eventually had to be withdrawn by the incumbent government as they were unsustainable for our economy. Consequently, Pakistan now faces the necessity of implementing stringent policy measures set by the international lending agency. One of these measures include a hike in interest rates, which is seen as crucial for unlocking the required financing. The implementation of these policy measures, particularly the increase in interest rates, has added significant pressure on the government. The rise in policy rates means that a considerable portion of the upcoming fiscal budget will need to be allocated towards markup payments. This allocation limits the available resources for other important areas, such as development projects and social welfare initiatives.

Moreover, the challenge for the government lies in striking a delicate balance between achieving economic revival and ensuring stability in the upcoming fiscal year. It becomes crucial to generate a decent level of economic growth while also maintaining stability in numerous indicators, such as inflation, exchange rates, and fiscal discipline. This requires careful economic planning, effective policy implementation, and a focus on fostering investor confidence. To mitigate the risk of default and promote economic stability in Pakistan, several policies can be considered including a reduction in interest rates to stimulate economic activity and minimize debt servicing, implementing tax reforms to broaden the tax base and also encouraging corporatization through effective tax reforms/measures, implementing structural reforms in commodity-producing sectors, and working on comparative trade policies to enhance national exports.

The Finance Minister Ishaq Dar has previously demonstrated a commitment to implementing an expansionary growth-oriented budget for Pakistan during his previous stint as the finance minister back in 2013 - 2017. His focus on investment-driven strategies was aimed at fostering inclusive development. As the nation faces the challenges of the current unprecedented situation, there is hope that the current finance team will draw upon their past success and navigate Pakistan towards a brighter future, employing their expertise and experience to overcome these difficulties.