Pakistan’s economy may grow three to four per cent during this fiscal year. Annual average consumer inflation may remain in the range of 11-12pc, according to the State Bank of Pakistan (SBP).

The central bank normally projects low and high GDP growth rates with a variation of one full percentage point owing to the fact that underlying performance factors remain volatile in the country.

In 2018-19, for example, the fiscal deficit shot up to 8.9pc against the initial target of 4.9pc, fuelling inflation and warranting rapid interest-rate tightening. High inflation, higher interest rates and overdue correction in the exchange rate amidst a massive fiscal imbalance upset various other projections like public-sector development, private-sector bank borrowings and growth in agriculture, industry and services sectors. All that eventually slowed economic growth to 3.3pc against the initial target of 6.2pc.

So logic demands we should not be too optimistic about economic growth during this fiscal year. We should keep in mind that against the SBP’s projection of 3-4pc, the IMF, World Bank and the Asian Development Bank foresee Pakistan’s economic growth below 3pc this year.

Meeting the SBP’s projected growth of 3-4pc in 2019-20 will depend more on how fast our agriculture sector grows because growth in industrial and services sectors is facing more complex challenges this year. A weaker rupee, high inflation, higher interest rates and the ongoing implementation of the IMF-dictated tax reforms are four key factors that continue to take their toll on the entire economy, including agriculture.

The fiscal deficit may remain high as the government continues to borrow heavily to retire old debts

But by and large major crops are performing better this year owing to a low-base effect. The performance by the livestock sector is also expected to remain on track because of strong export demand for dairy and meat products and domestic demand not yet showing signs of a major decline.

While projecting inflation of 11-12pc for this fiscal year, the SBP relies on a guarded fiscal deficit estimate of 6.5-7.5pc of GDP. If the deficit exceeds, it can not only upset numerous other growth-fuelling performance indicators but also add to inflationary pressures. We should keep in mind that further interest-rate tightening to fight inflation is no more a viable option. According to the SBP’s own admission, “the industrial sector faced a significant fallout of lower fiscal outlay (read reduced annual development spending) and monetary tightening in 2018-19.”

Chances of slippages in the fiscal balance still remain high as the government continues to borrow more for retiring old debts. There is no denying the fact that this government inherited a huge stock of domestic and foreign loans. But in its first year in power, Pakistan’s debt profile has worsened.

This government’s domestic borrowing totalled Rs4.31 trillion in 2018-19 against Rs1.56tr in 2017-18, reveals the SBP report. Contrary to the government’s claims, external debts and liabilities also increased markedly in 2018-19. In 2016-17, total external debts and liabilities of Pakistan stood at $83.4 billion, which swelled to $95.2bn in 2017-18, showing a build-up of $11.8bn.

In 2018-19, another $11.1bn was added to the stock of these debts and liabilities, taking them to a new height of $106.3bn.

Taking full-year exports and remittances to the projected levels will require extra efforts

On the external front, the SBP is pinning hopes for a course correction and economic growth on the current account deficit of 2.5-3.5pc of GDP in 2019-20 against 4.8pc in 2018-19. For achieving this much improvement, the central bank has projected as necessary $24bn remittances along with $26.2bn exports and $53.2bn imports. In the first quarter, our exports and imports stood slightly over $6bn and $11bn, respectively, and remittances remained below $5.5bn.

So meeting the import target seems not that difficult, but taking full-year exports and remittances to the projected levels will obviously require extra efforts. Increased political uncertainty at home and heightened security challenges owing to Indian atrocities in India-held Kashmir and along the Line of Control also pose additional challenges to the export target.

What further complicates the task is that the SBP is currently combating risks of trade-based money laundering and is keeping a closer watch on banks’ export/import financing. SBP Governor Dr Reza Baqir recently told a conference in Karachi that significant progress had been made between May and September to meet the action plan items set by the FATF. Addressing trade-based money laundering issues effectively before the next FATF meeting in February 2020 is crucial for Pakistan to get out of the grey list.

Attracting larger amounts of foreign direct and portfolio investment can be helpful in keeping our balance of payments in shape at a time when boosting exports is difficult. Thanks to attractive rates of return on Pakistan’s treasury bills and bonds, foreign portfolio investment has risen significantly during the first three months of this fiscal year.

Foreign direct investment has also started picking up. As pointed out by the SBP annual report, Pakistan needs to remove some regulatory constraints to attract sustainably thicker flows of foreign investment. One of them is that in addition to the latest investment policy framework of 2013 that is “liberal and fairly open,” there are two other regulatory frameworks that govern foreign investment in Pakistan — the Foreign Private Investment Act of 1976 and the Protection of Economic Reforms Act of 1992.

“The existence of these three concurrently active documents adds to investors’ confusion about the permissible scope of investment activities and the overall incentive structure in the economy,” laments the SBP report.

Published in Dawn, The Business and Finance Weekly, November 4th, 2019