No room for any missteps

The deportation drive is in full swing. Thousands of Afghan nationals staying “illegally” in Pakistan are being deported on a daily basis. More than 140,000 have already returned to their homeland voluntarily.

Sporadic bloody fight against remnants of the separatist elements in Baluchistan is ongoing. People are growing sceptical about the will of the Election Commission of Pakistan and the caretaker government to hold the next general elections on time. An air of uncertainty prevails across the country and in financial and commodity markets.

Fears about the Israel-Hamas war spreading across the region continue to grow. Since the beginning of the war on October 7, international oil prices have remained erratic and are projected to hit the $100 per barrel level soon. Pakistan’s import bill is becoming fatter despite efforts to contain it.

Foreign investors are repatriating profits and dividends earned in Pakistan much faster than in the past. The rupee is once again under pressure ahead of the talks with the International Monetary Fund (IMF) for the release of the second tranche of a $3 billion short-term bailout programme secured in July.

A few things are “on hold” — like the interest rate and the prices of petrol and high-speed diesel. Inflation has begun easing, though chances are it may remain above the projected level of 20-22 per cent, more so because of the gas price hike of up to 193pc notified last week but effective from July.

Any dramatic increase in international oil and commodity prices in case of further expansion in the Israel-Hamas war and any big misstep in Pakistan’s volcanic politics may reaccelerate inflation and send the local currency on a steep downward slope.

The seriousness of the politico-economic environment demands responsibility in every walk of life. There is no room for any misstep and for any miscalculation.

Economic growth remains subject to the condition that Pakistan attracts sizable foreign investment and that friendly countries fulfil their promises of fixing the country’s external financing gaps

Only recently, the government has approved a flat 45pc increase in the pay and perks of management position scales MP1, MP2 and MP3. The move is apparently aimed at hiring and retaining the best available talents in the bureaucracy.

Will this lead to better decision-making in the government agencies and the state-owned enterprises (SOEs)? Will better-paid senior bureaucrats in management position scales help reduce the current expenses of the government and stop financial bleeding in SOEs even partially? If so, well and good. But if this doesn’t turn out to be the case, the move will always be seen as another form of the misuse of public money.

Pakistan’s goods imports shot up to $4.806 billion in October, up 20.3pc from $3.994bn in September. But exports didn’t record a matching increase. In October, exports fetched $2.707bn, only 9.3pc higher than September’s exports of $2.476bn. The monthly trade deficit of $2.099bn recorded in October this year is expected to expand further — or at best, remain at this level in coming months.

Financing the trade deficit at this level through remittances that averaged $2.11bn during July-September is very much possible. But if the deficit expands in future (due to pricier fuel oil and larger import volumes of industrial raw materials), then remittances will not suffice, which makes it necessary to ensure that remittances also grow markedly from their current monthly average of $2.11bn.

Is that possible? Only time will tell. Much depends on the level of political stability in Pakistan, the economic situation in host countries of the Pakistani diaspora and whether the incentives being offered to banks to attract more remittances will make any dent in the informal channels and growing popularity of stablecoins — the new form of hundi/hawala.

The State Bank of Pakistan’s (SBP) decision of September 30 to leave its key policy interest rate unchanged at 22pc is understandable. The central bank believes that inflation has peaked. October’s headline inflation number — 26.9pc reinforces this belief. But the peaking of inflation doesn’t mean it will continuously decline in the coming months and will never rise again. That makes a case for holding the interest rate at where it is instead of opting for a reduction in it.

So, on balance, the interest rate holding is acceptable. But a broader question is how fast or slow the economic output will grow during this fiscal year because that will determine to a large extent how many new jobs will be created and how many Pakistanis will come out of poverty.

Inversely, the pace of economic growth will determine how many people can be saved from falling below the poverty line for the first time and how many of them can be saved from becoming unemployed. That is where all eyes are fixed. But sadly, chances for a strong economic rebound this year are slim. Pakistan’s economy is expected to grow between just 1.7pc and 2.5pc during this fiscal year (projected by the World Bank and the IMF, respectively). The SBP’s latest growth estimate is 2pc-3pc.

Though the agriculture sector’s outlook is good and large-scale manufacturing output has grown after a long time, achieving 3pc economic growth during this fiscal year seems too difficult. But why this pessimism?

Agriculture’s growth originates primarily from major crops and not from all the sub-sectors, including minor crops, dairy, livestock and fisheries. Besides, industrial output recovery is also not well diversified and is still at risk of losing momentum amidst the rising energy costs and growing political uncertainty.

Within the services sector, growth is evident more in the financial sector and less in the retail, wholesale trade and transportation sectors. A realistic projection of the economic growth could be somewhere between 2pc and 2.5pc, and that, too, remains subject to the condition that Pakistan succeeds in attracting a sizable foreign investment and that friendly countries fulfil their promises of fixing the country’s external financing gaps. Failure on this will turn everything upside down, eventually hurting economic growth.

Published in Dawn, The Business and Finance Weekly, November 6th, 2023