Long-term priorities of economy
A Reuters file image
Economy works well when the political system ensures that economic priorities do not shift at the whim of the government.
This applies both to short-term and long-term priorities of the economy. No economy can grow in the desired direction and at the desired speed, if the previously set parts of long-term goals are ignored.
Similarly, no sustainable economic growth can be achieved if there are no roadmaps for achieving it – gradually and orderly.
Pakistan’s economic history, though, is replete with examples of deviation from both short and long-term goals of sustainable economic growth. Little wonder then that the country is still struggling with low productivity of workers, inability of industries to absorb market shocks, high yield gaps in agriculture and least impressive performance in key areas of services ie trading, transportation, banking, housing, travel and tourism.
Keeping all this in mind is necessary before analysing why Pakistan’s external sector remains vulnerable to economic, market, political and systemic risks.
A closer look at the recently released balance of payments (BOP) statement for FY20 reveals some bitter realities that are direct products of years of economic mismanagement.
One of them is that even in its second year in power, the Pakistan Tehreek-e-Insaf (PTI)’s maiden government has failed to bridge the BOP deficit more through non-debt creating foreign currency inflows and less through funding from the International Monetary Fund (IMF) and some friendly countries.
Current account deficit
Pakistan’s current account deficit had widened to $19.19 billion or 6.1% of gross domestic product (GDP) in FY18. That happened because the then Pakistan Muslim League-Nawaz (PML-N) government was borrowing recklessly from the State Bank of Pakistan (SBP), ignoring previously set goals of bringing such borrowing to zero.
The purpose was to meet current expenses, which also included arranging local currency equivalent of external debt financing. The government was, thus, not able to promote savings at home to finance pro-growth investment.
It rather relied on foreign funding to finance investment for growth and the economy eventually grew 5.5% in FY18.
In FY19, when the PTI came to power, its biggest challenge was to contain the current account deficit. Another big challenge was to stop borrowing from the central bank or printing fresh currency notes that was pushing inflation to new heights.
Economic policymakers of the PTI managed to cut the current account deficit to $13.43 billion in FY19. But they failed to control the deficit by making a substantial increase in total earnings from export of goods and services as well as from remittances.
Though remittances went up a little, total exports did not. It rather relied on curtailing imports, which eventually suffocated domestic demand and choked industrial production.
Heavy borrowing from China, Saudi Arabia and the United Arab Emirates (UAE), however, made it possible for the PTI government to keep the overall BOP in the green zone. BOP recorded a surplus of $1.50 billion in FY19 but the central bank had to take a hit on its forex reserves.
As a result, the rupee weakened further. That accelerated the pace of inflation again, defeating one of the main purposes of drastically reducing government borrowing from the SBP.
In FY20, the PTI government kept its focus intact on the current account deficit and brought it down to $2.97 billion - again with no help from increase in total export earnings, with little help from some rise in remittances and mainly through a further reduction in imports of goods and services.
Domestic demand collapsed and industrial production went into the negative zone. The Covid-19 pandemic also played a part in it in the last four months of FY20.
Bumpy road
This time around, the policymakers could not manage to keep BOP in positive as it recorded a deficit of $5.3 billion.
Had the central bank taken a second consecutive hit on the foreign currency reserves, the deficit could have been reduced but that was not possible due to a host of reasons including a changed geopolitical environment.
Now that FY21 has started, the PTI government seems to be complacent about what it sees as its achievements on the external front – a reduced current account deficit and some growth in remittances.
However, if exports do not grow immediately and speedily, there will be a big mess in the external sector for the simple reason that remittances during the current fiscal year may fall due to global recession and there is no further room for containing imports.
Similarly, the government must realise that just like in FY20, the SBP cannot take a hit on its forex reserves in FY21. This means, the BOP deficit could either expand during the current fiscal year or will see only a marginal narrowing.
Silver lining
There is a silver lining, though. If Pakistan manages to attract huge volumes of foreign investment in the current fiscal year and if foreign funding by different countries continues, then the BOP deficit may be reduced drastically.
But heavy foreign direct investment (FDI) cannot come in during the ongoing global economic slowdown unless Islamabad offers the most attractive packages and invite investment in the areas liked by foreign investors such as oil exploration, mining, food and seafood processing, etc.
Foreign funding by friendly countries cannot continue to pour in unless Pakistan makes more trade, investment and foreign policy concessions to them.
The IMF, meanwhile, will start monitoring its ongoing $6-billion lending programme more strictly from October as in September the deadline for key structural reforms, relaxed in the wake of Covid-19, ends.
The writer is a mechanical engineer and is doing masters
Published in The Express Tribune, August 10th, 2020.
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