ONE by one, all the major institutional voices that speak on Pakistan’s economy are lining up to point out that the problems on the external sector are growing, and that remedial action is becoming more urgent. Latest to join the chorus is the World Bank in its South Asia Economic Focus 2017 report. Such a report is usually issued in the run-up to the fall meetings of the IMF and World Bank in Washington D.C. It describes the external sector situation as “particularly vulnerable” and says immediate action is needed to rectify it through revival of exports, slowing down of imports and stabilising remittances. It also points to the political risks facing the economy. “The quitting of ex-Prime Minister Nawaz Sharif has enhanced political risks and created some policy uncertainty.” Ironically enough, Finance Minister Ishaq Dar will not be attending the meetings this year due to his own legal entanglements at home, which are part of the political uncertainty the bank is talking about.
More worryingly, the report forecasts that “capital and financial flows during FY2018 and FY2019 will only partly finance the current account deficit, which will result in a drawdown of reserves during these two years”. So the situation is expected to continue, and contrary to the State Bank’s call for a “timely realisation of official inflows” to keep the current account stable in the ongoing fiscal year, the World Bank sees no real inflows capable of bridging the current account deficit in the foreseeable future. The fact that real sector growth continues unabated is largely irrelevant now. The growing fiscal and current account deficits are the key risks facing the economy, and it is irrational to argue that the real sector growth will somehow help to stem or reverse this trend. The prime minister is clearly aware of this reality, and his cabinet has taken a few steps to try and encourage exports while raising regulatory duties on unessential imports. But given where things stand (the IMF had declared Pakistan’s reserves to be “below comfortable levels” in July), far more vigorous action is required if the government wants to credibly avert serious pressures on the exchange rate this fiscal year. The World Bank’s note is meant only to shape its Pakistan conversation at the fall meetings, but without a finance minister present, there will not be much of a conversation to be had this year.
Published in Dawn, October 10th, 2017