Cautious optimism, despite outstanding month

Exports and remittances rise by over 40 per cent, inflation falls.

KARACHI:

February seems to have been a stellar month for the economy, with both exports and remittances from overseas Pakistanis rising by over 40 per cent and inflation declining. However, neither the government nor the business community are quite willing to celebrate just yet.

At first glance, the figures are stunning. Exports rose by 42.1 per cent, the highest rise in the country’s history, and remittances by 43.5 per cent compared to the same period during the previous year. Exports have crossed the $2 billion a month mark for the third month in a row. Remittances for the first eight months of the fiscal year are just shy of $7 billion. Even inflation, the most dreaded of economic disasters, tick downwards (albeit to a still high 12.9 per cent).

But digging deeper into the figures reveals a more complicated picture, one that suggests that the improvements have very little to do with government policy and may not even reflect on the competitiveness of Pakistani businesses.

For example, while exports are up by a considerable amount, so are imports. The trade deficit rose by 7.9 per cent for the first eight months of the fiscal year ending June 30, 2011 compared to the same period in the previous year. Much of the rise in exports is attributed to increasing global prices rather than higher volumes of products sold.

Inflation is down, but still well within double digits. And most observers realise that the dip in February was temporary, likely to be negated by sharp rises in the months ahead, as the government is forced by markets and the IMF to remove subsidies on fuel and electricity, which will send inflation much higher. The wholesale price index, a leading indicator, suggests that inflation may well exceed 20 per cent by the end of the year.

Remittances are about the only economic arena where an improvement in figures is, at least in part, a reflection of government policy. BMA Capital, an investment bank, estimates that the government’s crackdown against illegal money transfer methods, such as hundi or hawala, have resulted in most remittances coming through legal channels, resulting in improved official figures. BMA estimates that the proportion of money sent to Pakistan illegally has dropped from 50 per cent to 30 per cent.

There is a fear amongst some analysts that the temporarily improved figures may result in complacency on the part of the government. Remittances have improved Pakistan’s foreign exchange reserves, for example, which are over $17 billion. This has resulted in less pressure on the government to undertake tough but necessary reforms that the IMF has been insisting upon as a condition of its assistance.

While the country seems to be going through a short phase where economic figures have improved, the economy’s structural weaknesses remain unaddressed. This is why, even despite historically positive economic news, the mood in Islamabad is far from upbeat.

Published in The  Express Tribune, March 11^th, 2011.