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Economy at a tipping point

July 15, 2017


AFTER about two years of consolidation and growth, the economy appears to have reached a tipping point and has resumed its slide downwards. All along, we have been told by the government that it inherited a dismal situation but turned it around, pointing to the resumption of growth, the rise in foreign exchange reserves and the considerable investments being made in infrastructure. The latter, we have been told, are going to lay the foundations for future growth, thereby breaking the cyclical patterns of boom and bust that have held the economy hostage for decades now and brought the country to the doorstep of the IMF on more occasions than most other countries in the world. For a couple of years, the numbers supported this claim, and the sceptics had to dig deeper to find material that could challenge the story. In 2015, Moody’s rating agency upgraded Pakistan’s credit rating to B3, after a downgrade in 2012, in response to the improving macroeconomic situation.

But this fiscal year, it all began to change. Even the numbers are now lining up to testify against this story one by one. Two reports released back to back in the past two days make this abundantly clear. Moody’s decided on Tuesday to retain its B3 rating and outlook, but cited a long list of vulnerabilities that have opened up, particularly with the current account and fiscal deficits. Pakistan may enjoy one of the highest growth rates of all B3 rated countries, but it also has one of the biggest debt burdens amongst them. On the fiscal side, the consolidation undertaken in the past few years appears to have run its course; for the next two years the ratings agency sees the deficit climbing to 4.7pc and 5pc of GDP respectively, much higher than what the government projects. The reserves rose fourfold while the government’s story was in play, the agency notes, but “are still low in relation to current account payments” and on a declining glide path. Neither of these are encouraging developments, and if they persist, the growth story will be in jeopardy.

Then two days later came the IMF Article IV report, echoing many of the same concerns. After the usual bow to the positives, the Fund notes that recently “policy implementation has weakened and macroeconomic vulnerabilities have begun to re-emerge”, summing these vulnerabilities up by saying “fiscal consolidation slowed, the current account deficit widened, and foreign exchange reserves declined”. The government argues that these trends are temporary while CPEC-related projects are implemented. Growth will resume on a stronger trajectory, we are told, once those projects come online and the corridor gets going in earnest. It is a hope indeed, and nobody wants to take the shine off these words for no good reason. But hoping for the best is not a good way to manage deteriorating economic trends.

Published in Dawn, July 15th, 2017