Pakistan continues to suffer from ‘confidence deficit’, mainly because of poor economic indicators. Over the last one year, the level has gone down further because of the disparity because the officially released data and the ground realities. The miseries are multiplied due to the failure of economic analyst to link Pakistan’s economy with the regional and global landscape, particularly geopolitics. I have no reason to doubt that the situation has not improved, but the quantum is too low and the pace is dismal. As the first quarter will be over in a few days, the efforts should be aimed at developing strategies for the next quarter to achieve better results.
I am inclined to refer to the latest review of Pakistan’s economy by the lender of last resort. The International Monetary Fund (IMF) in its declaration released on Friday has stated that Pakistan’s economic growth rate is projected at 2.4% during the current financial year (FY20). The delegation of the Fund led by Ernesto Ramirez Rigo recently visited Pakistan and a declaration was released reviewing economic developments, after the commencement of Extended Fund Facility (EFF).
Rigo along with his delegation met top government officials during the visit and discussed progress in the implementation of economic policies. The statement said that while the authorities believe economic reform program is still in its early stages, there has been progress in some key areas. The transition to a market-determined exchange rate has started to deliver positive results on the external balance, exchange rate volatility has diminished, monetary policy is helping to control inflation, and the SBP has improved its foreign exchange buffers.
There has been a significant improvement in tax revenue collections, with taxes showing double-digit growth. Moreover, the FBR is undertaking significant steps to improve tax administration and its interface with taxpayers. Staff and the authorities have analyzed the worse than expected fiscal results of 2018-19, which were partially the result of one-off factors and should not jeopardize the ambitious fiscal targets for 2019-20. Importantly, the social spending measures in the program have been implemented.
To understand global outlook, referring to the recent warning of Christine Lagarde, former head of IMF could provide some perspective. Without mincing words, she warned, global growth looks fragile and under threat and policymakers should work to reduce man-made vulnerabilities. She suggested, policymakers should work together to try to reduce the fragility and resolve the uncertainty, the global economy faces.
Lagarde referred to certain self-inflicted wounds and termed issues like Brexit and trade frictions are man-made and can be man-fixed. Lagarde, who was the first woman to lead the lender of last resort and is set to become the first woman to take over the leadership of the European Central Bank later this year.
Her comments came on the day the Organization for Economic Cooperation and Development (OECD) said trade tensions are eroding world growth, prompting to cut its forecast for this year to the slowest rate since the start of the global financial crisis in 2008, just 2.9 percent down from the 3.2 percent expansion previously forecast.
“What we have at the moment is a rather mediocre growth” which is “fragile and it is under threat,” Lagarde said. She also said central banks have done much of the heavy lifting, preventing the financial crisis from becoming a depression, but officials handling government policies and purse strings now must step up. “I think central bankers have done an awful lot and were for many years regarded as the only game in town,” she said.
In her new post leading the European Central Bank (ECB), she said she would focus on job creation and stability, but stability alone may not be enough in the lives of real people. She will step into her new post in an environment where Donald Trump has maintained a relentless campaign against the US Federal Reserve for not cutting interest rates aggressively to stimulate growth.
Trump has also accused outgoing ECB President Mario Draghi of deliberately seeking to weaken the euro to gain unfair trade advantages, something Draghi has refuted. Others in Europe have criticized Draghi for cutting rates further into negative territory to juice a sluggish EU economy.
Lagarde said that experience shows that, in cases where politicians meddle with central bank independence, it “doesn’t pan out very well.” But she also said central bankers should strive to be “predictable.” “There is enough uncertainty around the world, not to add the uncertainty of what a central banker is going to do.” Central bankers “should deliver on their mandate and,” she said, “They should stick to facts and data so that they could be predictable.”
Pakistan’ economy does not work in isolation, but much deeper are impacts of policies of the incumbent governments, often driven by the multilateral financial institutions as well as geopolitics. If the global outlook remains gloomy, Pakistan’s miseries will multiply due to likely reduction in exports proceeds and remittances. On top of that Pakistani exporters will lose competitiveness in the global market due the hike in international oil prices and high interest rates. Pakistan’s economy is heavily based on agriculture and low commodity price will impact the rural income adversely as well as future crops.
The incumbent government is taking the credit of substantial decline in current account deficit (CAD). The deficit for the two month reduced to US$1.29 billion from US$2.85 billion during the same period. This was in line with the downward trend witnessed throughout FY19 when the deficit declined by 31% to US$13.58 billion, from US$19.8 billion in FY18. According to the trade summary issued by Commerce Ministry for the two months, exports jumped to US$3.738 billion as compared to US$3.650 billion during the same period last year, registering an increase of 2.41%. Similarly, imports for the period under review declined to US$7.553 billion as compare to US$9.768 billion during the same period last year, showing a decline of 22.68%. In total, the trade deficit for the two months of the current fiscal year was US$3.815 billion as compared to US$6.118 billion during the corresponding period last fiscal year.
Some analysts term such report deceptive because any decline in Pakistan’s imports is a sign of economic slowdown, not the growth.