Pakistan’s Economy To Stage A Comeback

Despite a shrinking GDP growth and high inflation, there are still enough positives to stage an economic rebound soon through economic policies

Will Pakistan be able to stage an economic rebound in the near future? It’s a simple but important question raised by many people in the country after the delay in a much-awaited deal with the International Monetary Fund (IMF), which is yet to give the go-ahead on the staff-level agreement that will unlock $1.2 billion under its $6.5 billion extended fund facility signed four years ago.

Pakistan’s economy has been passing through a struggling phase since April last year when the cricketer-turned-politician Imran Khan lost his government after the success of a no-confidence motion in the Parliament. The country is facing a looming default on external liabilities as the economic indicators have been worsening with every passing day.

The Bank of America, in its latest report, said the country would have to stop debt repayments if it isn’t able to secure funding from the IMF quickly.

“Unless the pay-out comes through soon, a state of moratorium looks unavoidable. Whether and when Pakistan can receive the next instalment from the IMF is still up in the air,” the report said.

Banking on IMF

Pakistan has implemented a series of policy measures to revive the IMF plan and receive a $1.2 billion tranche once the staff-level agreement is reached. Prime Minister Shehbaz Sharif, Finance Minister Ishaq Dar, and Finance Secretary Hamed Yaqoob Sheikh iterated that a deal was likely in the next few days. However, Pakistan has missed such timelines in the past. The country needs to repay about $3 billion of foreign debt by June, while $4 billion is expected to be rolled over,” central bank Governor Jameel Ahmad said recently.

Fitch Ratings said default is a real possibility in Pakistan, as indicated in the current rating. The rating agency has downgraded Pakistan’s long-term foreign-currency issuer default rating to ‘CCC-’, from ‘CCC+’, reflecting further sharp deterioration in external liquidity and funding conditions, and the decline of foreign exchange reserves to critically low levels. “The probability of default is high, but it is less than 50 per cent,” said Krisjanis Krustins, a Hong Kong-based director at Fitch.

Low GDP growth

The gross domestic product (GDP) is expected to shrink to two per cent during the current fiscal year ending June compared with six per cent in the previous financial year. Foreign exchange reserves at $4.3 billion by the week ended March 3 are good enough to cover a one-month import bill, while inflation in the upcoming months will likely remain elevated as additional taxes, increase in electricity and gas tariffs, and weakening of currency will push the prices higher.

The rupee, which lost almost 37 per cent of its value against the US dollar during the current financial year 2022-23, is under pressure due to shrinking forex inflows, falling remittances, and foreign direct investment in the country, which badly needs funds to revive its $350 billion economy. The nation’s low dollar stockpile cannot meet rising import bills, restricting the country’s ability to fund overseas purchases, stranding thousands of containers of supplies at ports, forcing plant shutdowns, and putting tens of thousands of jobs at risk. Conversely, the central bank is expected to increase interest rates by another 100 basis points to 21 per cent in its next monetary policy meeting (MPC) on April 4. Earlier this month, the MPC raised the policy rate by 300bps to 20 per cent, the highest level since October 1996.

Rebound still a possibility

“A stable government with a clear mandate to put the economy on the right track is a must. The country has no choice but to implement tough economic reforms, good governance and focus on promoting tourism and hospitality and reviving foreign direct investment as early as possible,” they said.