Pakistan's Economic Outlook

Pakistan's economy has been a roller coaster ride since its inception in 1947. The South Asian state has witnessed numerous boom-bust cycles, with each cycle bringing it closer to default. However, the default never came to pass as the state's leadership was able to manoeuvre it away from the crisis through reliance on external vendors and critical allies. Sadly, very different is the case today. Pakistan has entered another economic crisis which is regarded as the worst one yet by some experts. Gauging the situation our allies are also hesitant on helping the Islamabad recover.

Few Economic Parameters:

1. Inflation

According to data compiled by the Pakistan bureau of statistics, Pakistan's inflation rate for October 2022 stood at a whopping 26.6%. The main contributor to this hike was the food and non-alcoholic beverages, which increased 36.24% year-on-year. An individual paying Rs100 for a product in October last year would have to pay almost Rs136 for that item this year in October. This rise is alarming for an individual surviving on a minimum wage. The figures released by PBS last year have been controversial due to calculations and weightage of different commodities. Some expect the increase to be far more significant than the one described by the organization. Some deem it so because the nation's statistical body has been under pressure from political and non-political elements due to the consumer and business confidence ratio. Earlier this year, the controversial figure by the government body was also criticized by Steve H. Hanke, a professor of applied economics at the Johns Hopkins University, calling the numeral 'bogus'. An increase in the general price level of commodities has affected consumers` spending patterns and contracted their purchasing power, affecting the GDP growth of the fifth-largest country by population. The recent rise in domestic Inflation since the last quarter of 2021 reflects the super commodity cycle in the international market, which created a ripple effect on cash-strapped Pakistan.

2. Depleting Foreign Reserves 

As per the State Bank of Pakistan's monthly report, Pakistan's reserves with the central bank stood at $7.96 billion, barely enough to cover a month's imports, less than the three-month benchmark. Out of this, $1.05 Billion is to be paid in bond payments on December 5 2022, leaving behind roughly $7 Billion (supposing no trade deficit is there). Out of the $7 Billion, $6.5 Billion is from allies who have to lend the money to keep us afloat. Pakistan would require permission from them to use this amount. China refused Sri Lanka's permission in May 2022, due to which the state had to default. Experts fear that Pakistan may tread a similar path.

3. Foreign Direct Investment

The only other way to turn unsustainable Pakistan's foreign reserves into positive numerical except debt is through foreign direct investments in sustainable finance and energy needs. Sadly, Pakistan has been performing poorly on that end as well. This year, the country was downgraded by major rating agencies, reflecting the negative economic parameters aligned to political uncertainty since the ouster of the ex-PM of Pakistan with a successful no-confidence motion against him. The latest data from the State Bank of Pakistan, released on Monday, showed that FDI in July-October FY23 decreased to 348.3 million US$ from 726.5 million in the same period of the last fiscal year (FY22). Foreign direct investment has been steeply declining every year, while investment volumes are also shallow compared to other developing countries in the region, such as India, Bangladesh, and China. Pakistan stands nowhere close to many other Asian nations in drawing FDI. 

4. Credit Rating Downgrade

Fitch and Moody are some renowned rating agencies that provide investors with a country's economic health report. On October 21, 2022, Fitch downgraded Pakistan's rating to CCC+. Moody's also followed suit, downgrading Pakistan's outlook to negative. Owing to these developments, investor confidence in Pakistan has evaporated. Companies that had priorly planned to shift operations to Pakistan have now started looking for other regional partners. To make things worse, the five-year Credit Default Swap reached 120% in the second half of November 2022. However, Pakistan's finance chief has refuted any chance of default, adding that Pakistan's international bonds are minor transactions, "and technically there should be no impact on them". Still, some doubt the foundations on which these claims have been made.

5. Import Ban leading to Unemployment

Initially, the new government instigated an import ban to balance Pakistan's trade deficit. This also hampered the import of elements vital for the flourishing of the local production sector, which contributed to exports. On November 18, Businessmen expressed fear that 30,000 poultry farms would be closed and an investment of 1200 Billion will be stopped in the poultry sector due to the delay in the clearance of soybean. Furthermore, mobile phone manufacturers have shown concern over the delay in clearance of spare parts, which could eventually lead to the shutting down of factory units causing Unemployment. However, few economists support the decision to ban selected raw materials and new machinery by the newly elected government amid dollar scarcity in the country due to high imported energy bills reflecting the surge in international commodities. 

6. Decline in Remittances

Due to market uncertainty, a significant difference in the Interbank dollar and grey market dollar rates is visible. As of Friday, November 25, the dollar stood at Rs 223.94 in the interbank, whereas in the open market, the companies charged an 8-10% premium by taking the amount to Rs. 240. Remittances from Saudi Arabia, UAE, the U.K., and the U.S. are the top contributors to help Pakistan's current account. However, the percentage has been tumbling primarily due to host countries' economic and expatriate labour market conditions and the opportunity to send money through non-banking channels to arbitrage a premium in the trade. 

The Way Out

In order to steer the country out of this economic crisis, specific long-term and short-term decisions are to be made. The most immediate is renegotiating the IMF deal with the global lender. The IMF deal currently serves as Pakistan's lifeline. Pakistan's key allies have also assured the Islamic state that if Pakistan were to enter into the IMF agreement, they would also roll out loans to help the state. Moving forth, Pakistan has to launch a policy to assist its exporters so that they may become competitive in the international market. The policy needs to be implemented with austerity to reduce the chances of another boom-bust cycle.

Furthermore, the structural flaws in Pakistan's financial institutions need to be remedied. The institutions should be depoliticized immediately so that influential politicians do not use them for short-term benefits. If such measures are adopted with austerity, Pakistan will be in a position to stabilize itself in the coming years.

Written By: Shaban Zahid & Saad Ahsan