A bleak outlook

Published January 22, 2024

During the first half of this fiscal year (July-Dec 2023), the current account deficit fell to just $831 million from a whopping $3.63 billion in the same period of last year. Also, net foreign direct investment (FDI) in July-Dec 2023 rose 35 per cent to $862.6m from $640m in July-Dec 2023, according to the State Bank of Pakistan (SBP).

One can expect a substantial increase in FDI as foreign investment in the energy sector starts flowing in from Saudi Arabia, UAE and Qatar anytime this year. The Special Investment Facilitation Council, co-run by the civil and military leadership, is busy finalising a few big-ticket FDI deals in oil and gas exploration and processing as well as in the mining and agriculture sectors.

But despite unprecedented import contraction, both organic and policy-made, experienced in July-Dec 2023, the current account deficit for this fiscal year may touch the $5.7bn mark, according to the revised estimates of the International Monetary Fund (IMF).

This means that we are set to see the current account deficit growing from January to June this year, in a reversal of the trend seen in July to December 2023. That would surely affect the rupee’s health, and we may see the local currency depreciating once again, reversing the trend seen since September last year.

A weak elected government may not be able to promote economic growth in a harsh economic environment

Much depends on export earnings. During the first half of the current fiscal year, exports of goods fetched $15.3bn (free-on-board value) and exports of services $3.8bn, according to the State Bank of Pakistan, for an export total of $19.1bn. Meanwhile, forex spending on imports and goods and services totalled ($25.2bn plus $5.2bn) $30.4bn, resulting in a trade deficit of $11.4bn. Filling it won’t be easy.

But as we also export human capital and earn lots of foreign exchange through remittances, this gap will constantly be filled by the hard-earned money of overseas Pakistanis. During July-Dec 2023, remittances of $13.4bn (although lower than $14.4bn received in July-Dec 2022) helped Pakistan overcome the total trade deficit.

That has been the primary reason for the shrinkage we noticed in the current deficit in the first half of this fiscal year. Remittances have recently started regrowing, and if the trend persists during Jan-June 2024, we will have a sizable buffer for fixing the overall trade deficit.

But the question is, where would the total trade deficit reach at the end of this fiscal year in June? The SBP has begun easing controls on import payments, and large-scale manufacturing has come out of recession. These two factors, plus the growing IMF pressure to do away with all import restrictions, are sure to push import bills up from January to June 2024.

This may mean that our total import bill (of goods and services) will rise to $70bn or more. Even the most conservative estimate would be nothing less, particularly keeping in mind that the ongoing Red Sea crisis has started taking its toll on global trade in the form of disruptions in supplies and higher costs of shipments.

Can then Pakistan boost its total exports (of goods and services) to $40bn by June and get the remaining $30bn through remittances? That seems possible. But since we have some other items on the current account components list that also need to be taken care of and containing total imports at $70bn itself may prove elusive, the IMF has projected a $5.7bn current account deficit for this fiscal year.

With less than $1bn booked in the current account deficit in the first half of the year, we are heading towards a much faster growth in this deficit during the second half. That poses some big challenges for exchange rate stability and, consequently, for inflation management and economic growth, job creation and avoiding unmanageable income inequality.

The upcoming February 8 elections are being held in an atmosphere of fear, anxiety, and unavailability of a level playing field for all political parties and amidst fast-unfolding developments in geopolitics.

The Israel-Hamas war may turn into a broader regional conflict in the Middle East any time after the US attack on the Houthis-controlled part of Yemen after continued Houthis attacks on Red Sea shipping lanes and vessels unleashed to protest Israel’s genocide of Gaza. Things have become more complicated after the recent Iranian rocket attacks inside Pakistan that killed at least two children in a remote area of Balochistan.

Political polarity in Pakistan has already peaked before the elections. And even if elections are held peacefully, without any major untoward incident, further widening the gulf of mistrust between people and the powerful establishment seems inevitable.

The incoming elected government will be a weak government by all standards. Will it be able to promote economic growth in an economic environment characterised by a growing fiscal deficit, higher than desirable inflation, an external economy under constant pressure, and a geopolitical environment of expanding challenges and shrinking rooms for exercising saner options?

Published in Dawn, The Business and Finance Weekly, January 22nd, 2024

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