Pak­istan’s Eco­nomic Slump

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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.

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