THE start is encouraging, as the government has posted some early successes to boast about. Pressures on the country’s external sector are subsiding and foreign exchange reserves, which soared to over $9 billion at the end of the last month, have begun growing.

Encouraged by the implementation of fiscal and monetary reforms under the strict oversight of the International Monetary Fund (IMF) since the start of the current financial year, its international partners are unlocking their coffers for Pakistan.

The Asian Development Bank (ADB), for example, has approved a $1.3 billion budgetary support loan last week, which included $1 billion in the crisis-response facility, to help the country build up its low foreign exchange reserves.

This loan is part of $38 billion the government is expecting in foreign financing from its international partners over the life of the 39-month, $6bn Extended Fund Facility deal signed with the IMF to ease its balance-of-payments troubles five months ago.

Global investors are also following suit and piling up to buy government debt. According to the State Bank of Pakistan data, the country has so far attracted an unprecedented $1.18 billion in sovereign bonds since July.

This inflow in government debt securities is expected to spike to a record $3 billion by the end of the present fiscal year. That is not all. The current account turned into a surplus in October for the first time in four years, the trade gap has narrowed by more than a third and tax revenues have jumped 17pc in the first five months (July to November) of the present fiscal year.

Early signs of economic stabilisation are encouraging, but the government should not allow these improvements to take its eyes off the ball

In a nutshell, the government has so many wins to celebrate. But is the worst really behind us? Is it time to declare victory? Not yet.

The entire stabilisation is based on shaky ground. The ADB says Pakistan is still facing significant economic challenges on the back of a large balance of payments gap and critically low foreign exchange reserves together with weak and unbalanced growth.

Moody’s Investors Service upgraded Pakistan’s economic outlook from negative to stable early last week but reaffirmed the country’s credit assessment at B3, a junk rating. The outlook was improved because of a narrowing current account deficit, currency flexibility and lower external vulnerability risks.

Nevertheless, it cautioned that renewed deterioration in Pakistan’s external position, including through a significant widening of the current account deficit and erosion of foreign exchange reserve buffers, which would threaten the government’s external repayment capacity and heighten liquidity risks could bring pressures on the rating.

“A continued rise in the government’s debt burden, without prospects for stabilisation over the medium term, would also put downward pressure on the rating,” the Moody’s report said.

Why this warning? It is no secret that the trade deficit is narrowing not because we have significantly increased our exports. It is primarily because of unprecedented import compression policies being pursued for some time now as well as thanks to the low global oil prices. A surge in imports or an oil price shock can upend the improvement in the current account.

A sustainable improvement in the current account deficit will be impossible without raising domestic production and increasing exports. Although foreign investors are unlikely to exit the country’s debt market any time soon, they cannot be relied upon for a very long time. Similarly, the progress made so far on the fiscal side is largely owed to one-off nontax revenues.

Indeed, the tax collection has increased significantly in spite of an economic slowdown, it remains far below the target. No one expects the Federal Board of Revenue to achieve the Rs5.5 trillion tax collection target for this year.

Stabilisation of an economy weighed down by massive debt, low reserves, low productivity and weak growth is not an easy job, and it is foolish to expect the government to turn the tide in one or two years. It is going to be a long battle. Early signs of economic stabilisation are encouraging, but the government should not allow these improvements to take its eyes off the ball while its ministers celebrate their early wins and raise false hopes.

Published in Dawn, The Business and Finance Weekly, December 9th, 2019