There are enough signs to believe that the worst is over. But is it?

The stock market is thriving and the benchmark KSE-100 index “stormed past” the 34,400 level last week even if it remains way below its peak of May 2017. The treasury bill yields are declining and the bills are being traded in the secondary market at a discount to the cut-off yields. This has created policy rate cut expectations.

Many analysts feel that the first cut could come as early as in November. The bankers are, however, a little more cautious, expecting the central bank to reverse the direction of its monetary policy stance not before January.

The business community, which was severely critical of the State Bank of Pakistan’s (SBP) policy of tightening its monetary stance especially following the last increase of 100bps to 13.25 per cent in July, is no longer calling for an immediate decrease in the cost of credit as fiercely as it was only a few weeks ago as they think it is now a “given”. The focus of their discourse is changing and shifting to policies related to the ease of doing business and facilitation by the government.

There are also some improvements on the fiscal side. The Federal Board of Revenue (FBR), which has been allotted the most difficult task of raking in 45pc more revenue during the present financial year, has collected 15pc more tax income in the first quarter to September from a year ago. The inland revenues are up by 25pc.

The narrow tax net is being expanded – although the process is painfully slow, action is being taken against tax evaders, and the Board chairman has apparently taken a strong stand on his documentation drive despite protests by the traders. The government is also controlling its expenditure, albeit through cuts or slow releases of the development funds.

The external sector too is in a much better situation than it was a few months back. The trade deficit is down by 35pc cent in the first quarter of the fiscal year, more so because of the unprecedented import compression and lower global oil and commodity prices, and not due to an increase in exports. (In fact, the export sector is not picking as quickly as anticipated by some after the steep 50pc devaluation of the rupee as the ongoing US-China trade war has spawned fears of a global slowdown.)

The workers’ remittances are up, significantly. The foreign fund managers are buying public debt and the net foreign portfolio investment (FPI) in the government securities has shot up to $340 million since the beginning of this financial year. It is after two years that FPI has flowed into public debt.

The current account deficit, according to the SBP Governor Reza Baqir, has halved in the last three months. The gap had contracted by almost a third during the last financial year that ended on June 30. The concerns over the Financial Action Task Force (FATF) have also mitigated in recent months.

A return to instability will hurt the middle- to low-income population more than the extension of the stabilisation period

The government’s economic team claims it has successfully achieved all the indicative fiscal, monetary and structural targets for the first quarter set under the International Monetary Fund (IMF) programme.

Even multilateral lenders appear quite cheerful about the progress so far made. The Asian Development Bank (ADB), for example, recently said Pakistan has done well in stabilising the economy by taming the spiralling current account deficit and through the robust implementation of reforms to improve competitiveness. It further added: Pakistan is showing signs of recovery as the government’s fiscal consolidation and austerity measures to address the structural weaknesses have started to take effect.

Similarly, the IMF believes that Pakistan’s economic progress is “off to a promising start” as the current account is adjusting more rapidly than anticipated. The exchange rate volatility has diminished and inflation will decline in the coming months.

In short, there are quite a few signs showing that the fiscal, monetary and structural reforms the government had committed to the IMF have started to produce the intended results. But there are also some risks to the economic stability so far achieved. The fear of an upturn in the global oil prices continues to loom large on the horizon. The potential downturn in the global economy will mean lower unit values for the country’s exports.

The agriculture sector is also unlikely to perform as well as it was expected; the cotton crop output will decline in spite of a substantial increase in the area under cultivation. The hopes of an economic growth rate slightly exceeding the budgeted target of 2.4pc have been dashed, triggering fears of extension of the slowdown being experienced by the city dwellers to the rural economy. The cash the farmers found in their pockets following the massive currency devaluation in the last one and a half year is already depleting as they face losses.

Indeed, the trends of macroeconomic stability are starting to emerge. But it is too early to predict whether these trends will entrench themselves in the next few months, creating room for policy reversals. In the absence of a significant spike in the country’s overseas shipments, the reduction in the twin trade and current account deficits is unlikely to sustain for long. An increase in the global oil prices also has the potential to upend the stability so far achieved.

The economic stabilisation and adjustment policies are hurting the middle-class and low-income groups the most (as the wealthy have more than enough room to protect themselves). But a return to instability will hurt the middle- to low-income population more than the extension of the stabilisation period. A sustainable recovery will be beneficial for everyone — the poor and the rich.

It, therefore, will be advisable if the policymakers remain cautious till such times when the stabilisation trends take a firm hold before they decide to think of changing the policy directions.

Published in Dawn, The Business and Finance Weekly, October 14th, 2019

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