Improving fundamentals

Published August 4, 2022

DRIVEN mainly by a drastic reduction in the import bill, the sharp month-on-month decline of 47.8pc in July’s burgeoning trade deficit appears to have cheered up the country’s gloomy currency and stock markets. The home currency recorded its highest single-day gain of 4.2pc since 1999 as the rupee strengthened to 228.8 to a dollar in the interbank market. The shares market saw the benchmark KSE-100 index soar by 900 points, indicating the return of investor confidence — at least for now. Indeed, a statement from the IMF official on Monday that Pakistan had met all prior conditions (to qualify for the lender’s bailout money) also helped bring back some semblance of sanity to the markets, while the magic was in the trade data for last month. These developments, however, don’t reflect any real change in the economy and its fundamentals. No wonder, the reduction in the trade gap to its 18-month low of $2.64bn from $4.96bn in June, owing to the 38pc drop in imports and despite a 24pc fall in merchandise exports, has stimulated a debate on the sustainability of recent government and State Bank policies aimed at improving the trade balance through curbs on imports. Although the government has no option at the moment but to try and limit imports, these curbs can only provide temporary relief. At the end of the day, such restrictions will have to be eased if the economy is to grow and create jobs.

While it is necessary to reduce the nation’s import bill to narrow the trade gap and, consequently, the current account deficit, the longer-term solution lies in increasing and diversifying exports, attracting FDI and, last but not least, boosting remittances. This requires the government to focus on and address the structural issues facing the economy to improve agricultural and industrial productivity, document the economy to raise enough taxes to run the country, and remove impediments to exports, as well as implement policies to woo foreign and domestic investors to boost growth and create jobs. It is unrealistic to expect the current administration to undertake economic reforms when much of its effort is focused on firefighting day-to-day problems to avoid defaulting. But once the IMF programme is in place, and other multilateral and bilateral assistance starts flowing in over the next few months, it will be time for the government to begin the real work and execute reforms for long-term, sustainable growth.

Published in Dawn, August 4th, 2022

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