Pakistan’s V-shaped economic recovery

But the current account surplus will be short-lived if there isn’t an upturn in exports

It may not be erroneous to postulate that the pandemic brought the best out of the Pakistan Tehreek-e-Insaf (PTI) government. While we cherish the luxury of getting back to our routines, we must acknowledge the prudent decision-making and coordination of federal and provincial authorities that intrepidly weathered the Covid-related storm. Pakistan enjoys an idiosyncratic head-start compared to others, which is steering the economy towards a swift recuperation.

Asad Umar, the Minister for Planning, shed light on Pakistan’s V-shaped economic recovery last month. Despite being laughed at by many, the concept is proving veracious in Pakistan’s case given the burgeoning remittances, current account surpluses, ameliorating foreign exchange (FX), and an orderly market-based rupee. According to the Business Confidence Survey of the State Bank of Pakistan (SBP), the Business Confidence Index (BCI) has exhibited a 33% improvement from 39 points in June to 52 points in August. The BCI previously saw a roughly 22% plunge from 49 points in February (pre-coronavirus) to 38 points in April.

However, the phenomenon of a V-shaped economic recovery is not novel. The revival of the American economy post the recessions of 1920-21 and 1953 are popular examples of a V-shaped recovery. This type of economic recouping is considered a best-case scenario in a recession-hit economy as it involves a steep escalation in economic indicators following a sharp plummet. In Pakistan’s case, the outbreak of the coronavirus accorded the SBP the space needed for an aggressive monetary easing despite being in an austere IMF programme. A whopping 625 bps cut pruned the policy rate to 7%, which Pakistan may never have caught sight of during the IMF programme if the pandemic hadn’t occurred.

The Current Account Balance (CAB) demonstrated a surplus for the second consecutive month in August. As reported by the SBP, the current account surpluses stood at $508 million and $297 million in July and August, respectively. In aggregate, the CAB illustrated an excess of $805 million in July-August fiscal year 2020 compared to $1214 million ($1.2 billion) deficit in the same period last year. The mammoth surge is in the wake of towering remittances that soared in recent months owing to the compression of informal money markets and closure of international air travel. This has made compliance of formal banking routes obligatory for the expatriates to remit earnings back to Pakistan.

Pakistan is benefitting from the benign import prices of oil due to shallow demand. The import of services is also modest due to sparse international traveling. Simultaneously, the exporters are able to fetch exorbitant prices since the pandemic has disrupted global supply chains. The cumulative impact of these developments has resulted in a successive current account surplus. For the first time in Pakistan’s history, the CAB has endured three out of four consecutive months in the positive zone.

The transition in the exchange rate regime from a managed-float to a market-based rupee has also manifested to be propitious in this time of crisis. Not only has it assisted in making our exports compatible with those of Bangladesh, India, and other rivals in the international market, but it has also augmented the tumbling foreign exchange (FX) reserves. The spiralling trajectory of the FX reserves perpetuated despite the proliferation of the coronavirus in Pakistan since a stable currency attracts dollars from abroad in the form of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). In consonance with SBP data, the total liquid FX reserves grew from $18.8 billion in February 2020 to $19.9 billion in August 2020.

A V-shaped, precipitous economic retrieval is evident in the case of Pakistan. The SBP has to persist with its pro-active role in line with the forehanded vision of an economically blossoming Pakistan. It is moot to expect a positive CAB in the future because the imports will pick up the pace once economies reclaim their pre-Covid economic standings. The current account surplus will only be short-lived if there isn’t an upturn in exports on robust fundamentals. Hence the government must ensure that it devises a strategy focused on perennially increasing exports.