Pakistan’s Economic Slump
Along with political turmoil, Pakistan faces economic headwinds ahead of a national vote with achievements made under a three-year International Monetary Fund loan program starting to fade. The government is now more focused on handling the fallout <https://www.bloomberg.com/politics/articles/2017-08-27/trump-s-afghan-strategy-poisedto-fail-pakistan-s-premier-says> from the disqualification of Nawaz Sharif as prime minister and U.S. President Donald Trump’s comments on Pakistan’s alleged harbouring of terrorist groups. Yet looming in the background is a potential economic slump. The current account gap had more than tripled to $4.3 billion in the quarter ended June, the worst level in more than four decades, according to data available data. The State Bank’s foreign exchange reserves have declined by a quarter since an October peak. Investors have been spooked by the political and economic deterioration and the nation’s key stock index entered bear market territory. Pakistan has also faced criticism of its handling of the currency after a devaluation spat between the State Bank and finance ministry. Despite calls from the IMF and Moody’s Investors Service for the State Bank to abandon its grip on the currency and allow more flexibility, the regulator was blamed for “miscommunication” over the Pak rupee’s depreciation. Macroeconomic vulnerabilities were building up again, primarily driven by domestic factors such as fiscal slippage and authorities’ attempts to maintain exchange-rate stability. The politicization of exchange-rate management contributed to the widening of the trade deficit, weakening the macroeconomic outlook.
Prime Minister Shahid Khaqan Abbasi had ruled out any currency devaluation to boost flagging exports and to fix widening deficits. He instead suggested cutting “unnecessary” imports. Pakistan’s currency has been the most stable in Asia since 2014 against the dollar, according to data. Still, Abbasi expected economic growth to be close to the government’s 6 percent target for the year ending June. That confidence stemmed from Chinese investment in the nation. China is financing power plants and infrastructure projects valued at more than $50 billion as part of Chinese President Xi Jinping’s “One Belt One Road” push. It will help end energy outages before elections that have resulted in long cuts at homes and factories. The removal of Sharif after a court-mandated probe into his family’s finances did hurt business sentiment, but projects are continuing as planned and growth targets will be met, according to Abbasi. The Prime Minister said the country was facing challenges, but measures were being taken to meet them. It was also being claimed that Pakistan’s exports were showing signs of recovery and remittances had improved. While imports had seen strong growth, this was primarily on account of power generation machinery for CPEC power projects. It was expected that import of nonessential goods would slow down in view of various measures that had been taken.
But there was still a sense of pessimism. Pakistan’s annual current account deficit was forecast to be widening to 5 percent of the economy. The gap was more than double deficits compared with 1.5 percent in India and 1.9 percent in Indonesia, according to IMF estimates. This was attributed to political uncertainty and short term weakness in the reform front. In the longer term, Pakistan might become an attractive case due to economic reforms executed during the IMF program and infrastructure projects in the pipeline. Prime Minister is of the view that the government won’t seek another IMF bailout package and was poised to introduce “radical” tax reforms. Former Prime Minister Nawaz Sharif had taken a loan from the multilateral lender to stave off a balance-of-payments crisis in 2013, and the facility was completed in September.
The Pakistani rupee has been in trouble against the US dollar. This is probably an apparent attempt by the government to alleviate country’s worsening current account deficit. Despite the weakening of the rupee, long called for by investors, stocks have also fallen, with the country’s benchmark index dropping low. Analysts say uncertainty over Pakistan’s political leadership and the stability of its economic policies had led investors to withdraw their money. Pakistan has endured a turbulent time since the ouster of Nawaz Sharif on charges of corruption. Since then the country’s current account deficit has continued to worsen, as exports and remittances from Pakistanis abroad have dropped, while imports and payments to Chinese companies as part of the $55bn China-Pakistan Economic Corridor have risen. Despite the deteriorating deficit, the government has been rejecting calls to allow the rupee to decline. While the current account issue has left Pakistan’s economy looking fragile, its politics have also been tested by a series of anti-government protests. One Karachi-based fund manager said concerns about a fresh round of protests had triggered selling on the stock market.