Pakistan has received a lot of good news lately on the economic front. The country posted impressive growth figures for the last fiscal year.
The large-scale manufacturing sector grew by more than 14% from July 2020 to May 2021, thanks to rapid growth in the automotive, textile, pharmaceutical and chemical sectors. Pakistan received a record $ 29.4 billion in remittances in the past fiscal year. The country has “almost” completed the FATF action plan, with only one action pending. And the vaccination campaign and the handling of the pandemic have been truly impressive, mitigating the negative economic impacts. Yet the economic uncertainty is far from over.
Inflation remains high. The trade deficit rebounded. Circular debt keeps piling up. And the debt-to-GDP ratio remains in the red zone. Pakistan’s recent economic recovery therefore remains fragile, especially in the wake of the impending fourth wave of Covid-19.
Looking ahead, Pakistan’s short-term economic path would depend on three things: the country’s revenue performance, its current account, and the fate of the IMF program.
On the revenue side, the government has set an ambitious target of Rs 5.8 trillion for RBF to finance the expansionary budget to stimulate the much-needed economy. Achieving this ambitious goal would in turn depend on a multitude of fiscal and enforcement measures. While this goal is not impossible to achieve, a more realistic assessment suggests that the RBF may not meet this Rs300-400 billion target. In addition to tax revenues, it would also be essential to meet targets for other sources of revenue in order to contain the budget deficit, such as the proceeds of privatization and the petroleum exploitation tax. Any shortfall on the revenue front can negatively impact promised development spending and may even require the introduction of a mini-budget in the coming months.
Next comes the checking account. So far, healthy remittances have really helped the current account turn green, despite the trade deficit reaching $ 30 billion. With the rebound in growth, imports are expected to swell, further widening the trade deficit. It remains to be seen whether remittances can maintain their healthy trajectory to offset the growing trade deficit.
The increase in remittances can be attributed to the pandemic which has severely restricted international travel, the crackdown on hawala / hundi as part of the FATF action plan, and various government measures such as the push to the use of formal banking channels. But given that remittances from Saudi Arabia, UAE, and GCC countries only increased 9-16%, while those from the UK, US, and the The EU posted growth of over 50%, says at least some of these increased remittances would evaporate once air travel fully opened up.
On a monthly basis, the CAD has already hit $ 632 million and if it continues like this the rupee may face more pressure leading to devaluation.
The fate of the IMF program will also play an important role in determining the short-term outlook for our economic future. Given our external financing needs, Pakistan cannot afford to withdraw from the IMF program. This means that not only will we have to meet our revenue target, but we may also need to create additional fiscal space and push forward with structural reforms. The country would therefore be faced with a delicate balance, as too much tightening could disrupt efforts to stimulate growth, but too little effort would disrupt the IMF program.
In addition to these economic factors, the rapidly evolving situation in Afghanistan and the looming threat of a fourth wave may also affect some of these calculations. However, once Pakistan succeeds in overcoming these challenges, the country’s medium-term economic future looks bright.
Posted in The Express Tribune, July 20e, 2021.