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Surging macroeconomic risks—A hindrance in Pakistan’s reserve course

CPEC related projects can help bring sluggish economy back to life

World Bank has recently alerted that macroeconomic risks in Pakistan have increased considerably during the fiscal year 2017 while the external balance is specifically not safe given the continuous current account deficit, disturbing the Pakistan’s reserve position. Since the International Monetary Fund (IMF) program came to an end, outside indicators of the economy have deteriorated, according to ‘The South Asia Economic Focus Fall 2017’ released ahead of the forthcoming World Bank and IMF annual meetings.

Pakistan only a year ago was in a good position. The international reserves were large enough to cover the current account deficit the service of external debt. The sources of the increased vulnerability should be a priority, suggests the report. Pakistan macroeconomic regulation declined after the IMF program came to an end. In recent years, there had been clear progress in restoring macroeconomic stability and laying some of the foundations for higher growth.

Pakistan also recouped emerging market status in the MSCI index and made headway on the China-Pakistan Economic Corridor (CPEC). Nevertheless macroeconomic discipline worsened in recent months.

The report says that developing the external balance depends upon a resurrection in exports, a lessening in imports, and steady remittance flows. In the non-appearance any of these factors, the constant current account deficit will put further pressure on already dwindling reserves.

The fiscal position is also expected to degenerate during the election time, which would affect debt trends and maintain debt at the current high level. The report says that the dislodgement of former prime minister Nawaz Sharif has enhanced political risks and created some policy uncertainty. The upcoming national election in 2018 may affect the reform momentum and macroeconomic policy. Slower progress would weaken growth prospects and discourage private investment.

The outlook until fiscal year 2019 is for moderately higher growth, and this outlook is dependent upon continued macro-economic and political stability, as well as steady progress in implementing the government’s medium-term reform programme. The outlook assumes that oil prices will increase moderately but remain low. The increased growth is projected to come from the services and the industrial sectors, while the, boost would be driven by public and private consumption, followed by a moderate increase in investment.

The pressure on the current account is expected to continue as the trade deficit will remain high during 2018 and 2019. Exports are expected to recover during fiscal years 2018 and 2019. It is also expected that FDI flows will strengthen due to accelerated implementation of CPEC projects. The report says that widening of the fiscal deficit during fiscal year 2018. This increase in the fiscal deficit may be driven by a slower increase in tax revenues, both federal and provincial, and a sharper increase in expenditures. Inflation is expected to rise due to higher domestic demand pressures and a slight increase in international oil prices.

In the past couple of years following a drop in global crude oil prices the government has troubled petroleum consumers with heavy taxes, especially on petrol and the HSD, which are widely used in small and heavy vehicles as well as in agriculture sector. Consumers in Pakistan have been paying up to 38 percent more on oil purchase compared with prices prevailing in the international market in order to make up for the shortfall in government revenues.

A decline in the Pakistani stock exchange known as KSE-100 as political uncertainty and dwindling economic prospects played disaster. Gross foreign exchange reserves built up by borrowing heavily during the IMF program are still over $14 billion, worth three months of import cover.

The largest losses in reserves in recent months have resulted from central bank intervention to defend the untenable exchange rate of the rupee. The worst news has continued to pour in for the Pakistani economy. The government will certainly try to shift the blame onto the accountability drive against its founder and former Pakistani prime minister Nawaz Sharif who had promised an ‘economic explosion’ at the start of his third. Consumers in Pakistan have been paying up to 38 percent more on oil purchase compared with prices prevailing in the international market in order to make up for the shortfall in government revenues.


There is hope in the form of the China-Pakistan Economic Corridor, a project that can potentially resurrect Pakistan’s sluggish economy. There are factors at play such as the lack of an industrial infrastructure that is dampening further Chinese investment. Pakistan’s economic growth is expected to increase gradually and the economy is projected to grow by 5.4 percent in next fiscal year 2017-18. Pakistan’s economic growth is expected to increase gradually and the economy is projected to grow by 5.4 percent in next fiscal year 2017-18. A delay in the completion of CPEC projects, as evident from the first year’s performance, and an inability of the government to mobilize revenues and rationalize expenditures can affect investment and hurt economic growth, noted the World Bank in its biannual ‘South Asia Economic Focus Fall 2016’ report.

The report also highlighted the issue of growing tension in relation to Kashmir between India and Pakistan; two nuclear powers that have fought four wars and which it added “is watched with concern”. Political economy risks are widespread across South Asia and uncertainty, more broadly, needs to be managed with a view to creating an attractive environment for foreign and domestic investment alike, it added. The Washington-based lending agency said that gradual growth trend is expected by increased public investment supported by CPEC. It has projected that Pakistan’s economy may grow at a rate of 5 percent during the current fiscal year 2016-17 minus 0.7 percent below the official target. Pakistan needs more than 7 percent annual economic growth rate to create sufficient jobs for new entrants, says the World Bank in its recent report. Public investment can expect a boost from projects related to the CPEC agreement, but remains subject to uncertainty coming from potential implementation delays, it added.

The report remind us the October 2015 study conducted by the Institute of Policy Reforms (IPR) that highlighted that the medium-term economic framework prepared by the International Monetary Fund (IMF) made no provision for a big rise in government investment in the next two years to create room for timely completion of the $11 billion infrastructure projects under CPEC. The IPR study did not work out the impact of administrative weaknesses that are equally hurting the implementation of CPEC projects.

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